Impurities and defects in Kondo insulators can have an unusual impact on dynamics that blends with effects of intrinsic electron correlations. Such crystal imperfections are difficult to avoid, and their consequences are incompletely understood. Here we study magnetic impurities in Kondo insulators via perturbation theory of the s-d Kondo impurity model adapted to small bandgap insulators. The calculated magnetization and specific heat agree with recent thermodynamic measurements in samarium hexaboride (SmB$_6$). This qualitative agreement supports the physical picture of multi-channel Kondo screening of local moments by electrons and holes involving both intrinsic and impurity bands. Specific heat is thermally activated in zero field by Kondo screening through sub-gap impurity bands and exhibits a characteristic upturn as the temperature is decreased. In contrast, magnetization obtains a dominant quantum correction from partial screening by virtual particle-hole pairs in intrinsic bands. We point out that magnetic impurities could impact de Haas-van Alphen quantum oscillations in SmB$_6$, through the effects of Landau quantization in intrinsic bands on the Kondo screening of impurity moments.
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