This Was the Biggest Small Business Tax Mistake I Made in 2024

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Open enrollment gives small business owners a powerful opportunity to get lower taxes and bigger investment gains. But only if you avoid this one big mistake. [[{“value”:”

This is an embarrassing true story: I made a big tax mistake for 2024. As a small business owner, I buy health insurance for my family on HealthCare.gov. In 2022, I had a health savings account (HSA) as part of our health insurance. But last year at open enrollment, I accidentally chose a non-HSA-eligible plan.

Choosing the wrong health insurance plan and not getting to use an HSA meant paying thousands in extra taxes in 2024. If you miss your chance to choose an HSA-eligible health insurance plan for 2025, you could miss out on up to $8,550 of 2025 tax deductions.

Let’s take a closer look at what a health savings account is, why it’s such a great tax break, and why small business owners should try to avoid my tax mistake.

What is a health savings account?

A health savings account is a special kind of tax-advantaged account that lets you set aside money for healthcare costs. You can use your HSA to pay for IRS-approved qualified healthcare costs with pre-tax dollars.

Or if you don’t have a lot of healthcare expenses right now, you can use your HSA funds to buy stocks and ETFs.

Just like a traditional IRA, the HSA can serve as another place to put tax-deductible dollars to invest for the future.

The IRS has announced that the new deductible contribution limits for HSAs for 2025 will be:

$4,300 for an individual with self-only health insurance coverage$8,550 for family coverage

Especially if you have some extra cash to save outside of a traditional IRA, or if you don’t qualify for a tax deduction on a traditional IRA, opening a health savings account is generally a good move. It’s an excellent way to get a tax break on your healthcare costs — potentially increasing your tax deductions by thousands of dollars.

How to get a health savings account

Not everyone can use an HSA. To qualify for a health savings account, you need to have a qualifying high-deductible health plan (HDHP). This is where you have to be careful to choose the right plan at open enrollment. For 2025, here are the limits to have your plan qualify as an HDHP that is eligible to use a health savings account:

Single person (self-only) insurance coverage: Your health insurance plan’s annual deductible must be at least $1,650, and its annual out-of-pocket expenses must not exceed $8,300.Family insurance coverage: Your health insurance plan’s deductible must be at least $3,300, and annual out-of-pocket expenses must not exceed $16,600.

This is where I made my mistake at last year’s open enrollment: I chose a health plan that was high deductible, and had high out-of-pocket expenses — but the plan’s out-of-pocket expenses were too high for an HSA. All year, I’ve been stuck with this non-HSA-eligible plan, missing out on $8,300 in tax deductions for 2024.

Read the fine print carefully when you’re signing up for health insurance at open enrollment 2024. If you want an HSA-eligible plan, be careful not to accidentally choose a plan with out-of-pocket costs that are too high to qualify for an HSA.

Why HSAs are great for small business tax breaks

Here are a few quick reasons why health savings accounts are worth considering.

1. You get an immediate tax deduction

Deduct up to $8,550 for 2025 (with family coverage). People age 55 and over can make an additional $1,000 catchup contribution to HSAs.

2. Use your HSA money for tax-advantaged “discount” on healthcare costs

The most obvious way to use HSA money is to pay for healthcare. You can use your HSA to pay for a wide range of qualified medical and dental expenses, like hospital bills, doctor visits, dental visits, prescription drugs, orthodontics, and more.

Every dollar you spend from your HSA is effectively giving you a percentage discount on healthcare based on your tax bracket, because you’re spending pre-tax dollars. For example, if you’re in the 22% tax bracket, every $100 contributed to your HSA saves you $22 on taxes. This can take some of the sting out of paying medical bills with HSA money.

3. Let your HSA money grow tax free for future healthcare costs

You don’t have to spend your HSA money right away. If you don’t have a lot of healthcare costs, or if you have other cash you can use to pay for the current year’s healthcare spending, you can invest your HSA money for the long term. HSA money can be invested in ETFs, stocks, bonds, or other assets to grow tax free for the future — no capital gains tax on the investment growth.

And if you use your HSA money for healthcare costs at any time, you can withdraw it tax free. Or if you wait until after age 65, you can withdraw your HSA money for any reason — but you’ll owe income tax on withdrawals that are not used for healthcare expenses. The HSA can serve as an “extra” retirement savings account — use it for healthcare, or just “fun money” or everyday living expenses in retirement.

Bottom line

Getting an HSA is a great tax move for small business owners, who often struggle to find affordable health insurance plans and end up paying for lots of medical bills out of pocket. Choosing an HSA-eligible plan should be your top priority for open enrollment for 2025.

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