Health Insurance Premium Deduction Benefits for Small Businesses

As a small business owner, navigating the world of health insurance can be overwhelming. But did you know that you can deduct health insurance premiums from your taxes? This can be a huge cost savings for your business.

For example, if you pay $10,000 per year in health insurance premiums, you can deduct that full amount from your taxable income. This can result in significant tax savings, especially for businesses that are just starting out.

However, it's not just about the tax savings. By deducting health insurance premiums, you can also reduce your business's overall expenses. This can help you allocate more resources to other areas of your business, such as hiring new employees or investing in new equipment.

According to the IRS, businesses can deduct health insurance premiums as a business expense, which can be a 100% deduction. This means that you can deduct the full amount of your premiums, without any limitations or phase-outs.

Pre-tax deductions can greatly reduce the tax burden on both employees and employers. Most employer-sponsored health insurance premiums are pre-tax for both employees and employers, which can mean big tax savings.

To qualify for pre-tax deductions, you must offer a Section 125 qualified plan, such as a cafeteria plan. This type of plan allows you to deduct employer contributions and employee deductions from payroll taxes.

You can calculate pre-tax health insurance deductions using a simple formula. Let's say your employee earns $2,000 a month, their monthly premium is $500, and they pay 25% of the cost. You would deduct $300 from their paychecks and contribute $300 to the premiums. This would leave their pay at $1,700, which is the amount you would withhold taxes on.

Here's a list of other health-related benefits that qualify as pre-tax deductibles:

Pre-tax deductions can also include medical expenses that exceed 7.5% of an employee's adjusted gross income. These expenses can include preventive care, mental health services, and dental and vision insurance premiums.

Calculating pre-tax deductions is a straightforward process. You can use a simple formula to calculate what to deduct from your employee's earnings for pre-tax health insurance.

Let's say your employee earns $2,000 a month, their monthly premium is $500, and they pay 25% of the cost. To calculate the deduction, you multiply the premium by the percentage, which is $500 x 0.25 = $125. Then, you subtract the deduction from the employee's earnings, which is $2,000 - $125 = $1,875.

You must deduct health insurance before withholdings, and afterwards, you calculate the 7.65 FICA rate based on the adjusted gross income, which in this case is $1,875, not $2,000.

Here's a simple formula to calculate pre-tax health insurance deductions:

Make sure to explain to employees that they can't claim those premiums back in their tax return because they've already received the tax benefit.

The average cost of health insurance for a small business can be substantial. According to a report by Kaiser Family Foundation (KFF), the average small business pays $7,813 for individual plans, with the employee contributing $1,328.

For family plans, the average cost is significantly higher, at $21,804. This breaks down to $13,737 paid by the employer and $8,067 paid by the employee.

It's worth noting that the employer's contribution can vary depending on what employees want to include in their plan and what kind of coverage they need.

Health insurance costs can be a significant expense for small businesses. The average cost of health insurance for a small business is around $7,813 for individual plans and $21,804 for family plans.

Employers typically pay a larger share of the premium, with the employee contributing a smaller amount. For individual plans, the employer pays around $6,485 and the employee pays around $1,328.

The cost of health insurance can vary depending on the type of plan and the level of coverage needed. Employers may also consider offering different plan options to employees to suit their individual needs.

Here are some examples of the average costs of health insurance for small businesses:

It's essential for small business owners to consider the tax implications of health care expenses as part of their overall financial strategy.

You probably know your employees well, which is great for tailoring a health insurance plan to their specific needs.

Younger employees with no dependents may prefer a plan with smaller premiums, but this means higher pay-as-you-go costs and unpredictability with medical expenses for the year.

Employees with families or those over 55 may prefer higher premiums, which mean lower deductibles and more affordable hospital and medical bills.

As a small business owner, you know your employees well, so you can tailor your health insurance plan to their specific needs.

You probably have younger employees with no dependents, good overall health, and lower savings who prefer a plan with smaller premiums.

Higher pay-as-you-go costs and unpredictability with medical expenses for the year are the drawbacks to this route.

Younger employees with no dependents and good overall health may prefer a plan with smaller premiums.

Higher premiums mean lower deductibles and more affordable hospital and medical bills, which is appealing to employees with families and those over the age of 55.

In these demographics, minor health problems are more likely to occur and medical bills can pile up more quickly.

Homebase offers a payroll feature that can auto-calculate payments, including health insurance, for small business owners and managers.

This means you can rest assured that your employees' healthcare expenses are error-free and taken care of.

If you're self-employed, you can claim medical insurance premiums you pay for yourself, your spouse, and your dependents as a standard deduction for medical insurance that reduces your AGI.

You can deduct long-term care insurance premiums much in the same way that you deduct health insurance premiums, but only if you itemize your deductions and your combined health and long-term insurance premium payments exceed 7.5% of your AGI.

To be eligible for tax deductions, a long-term care policy must meet certain regulatory standards, such as having the option to renew the policy automatically and nonforfeiture benefits.

The IRS sets a maximum dollar amount that you can deduct from your taxes based on your age.

You can also deduct other health-related benefits that qualify as pre-tax deductibles, such as Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and supplemental health insurance coverage.

Here are some examples of other medical expenses that are tax-deductible:

And, you can also deduct travel costs related to medical care, such as the cost of gas and oil for a drive to a physical therapy appointment.

As a self-employed individual, you can deduct the medical insurance premiums you pay for yourself, your spouse, and your dependents. This is a standard deduction for medical insurance that reduces your AGI.

However, if you receive a premium subsidy in the exchange to cover a portion of your premium, you can only deduct your after-subsidy premium on your tax return. This is because of the "double-dipping" rule.

The amount of premium subsidy you receive is related to your modified adjusted gross income (MAGI), but your MAGI also depends on your premium subsidy. This can create a circular problem, but the IRS has addressed this issue. Your tax adviser or tax software can help you sort it out.

As a self-employed individual, you're in luck - the health insurance premiums you pay for yourself and your dependents are probably tax-deductible.

This is true regardless of whether you get your insurance through the exchange/Marketplace in your state, or in the individual market outside the exchange.

You can only deduct the amount you actually pay in premiums, not the full premium amount.

If you receive a premium subsidy in the exchange to cover a portion of your premium, you can only deduct your after-subsidy premium on your tax return.

This means you can't double-dip and claim a deduction for the entire premium amount if you're receiving a subsidy.

You can claim medical insurance premiums you pay for yourself, your spouse, and your dependents as a standard deduction for medical insurance.

Eligibility for Subsidized Health Insurance is a bit of a puzzle, but let's break it down. You can only get a premium subsidy if you buy your own health insurance through the exchange or in the individual market outside the exchange. Premium subsidies, also known as advance premium tax credits (APTC), are available in the exchange, but not outside the exchange.

The amount of premium subsidy you receive is related to your modified adjusted gross income, which is an ACA-specific calculation. This means the IRS takes into account your premium payments when determining your adjusted income, and vice versa. It's a circular problem, but don't worry, your tax adviser or tax software can help you sort it out.

Even if you're self-employed and buy your own health insurance, you can't deduct the premiums if you're eligible to have coverage that's subsidized by an employer, including your own or your spouse's. This rule applies even if you declined that coverage and bought your own plan instead.

Long-term care and other expenses can be a significant burden, but there are ways to deduct them from your taxes. You can deduct long-term care insurance premiums if you itemize your deductions and your combined health and long-term insurance premium payments exceed 7.5% of your adjusted gross income (AGI).

For self-employed individuals, the 7.5% threshold doesn't apply, and you can deduct your monthly long-term care insurance costs from your taxes as long as you turn a net profit.

Not all long-term care insurance policies qualify as tax-deductible, so it's essential to check with your broker or provider before buying a policy. To be eligible for tax deductions, your policy must meet certain regulatory standards, such as having nonforfeiture benefits and the option to renew the policy automatically.

The IRS sets a maximum dollar amount that you can deduct from your taxes based on your age. You can also deduct other medical expenses that were ordered by a doctor or health care professional, such as:

You can also deduct travel costs related to medical care, such as the cost of gas and oil for a drive to a physical therapy appointment.

Most Americans under 65 get their health insurance from an employer, with employers paying the majority of the premium in most cases. The premiums that employees pay are typically payroll deducted pre-tax, but this isn't the case for domestic partner benefits.

Employers pay around 83% of health insurance premiums on average, according to the Kaiser Family Foundation. You can keep yourself competitive by offering attractive health insurance coverage.

In almost all cases, employees can't deduct their health insurance premiums on their tax return if they were already paid with pre-tax money throughout the year. This means if you're paying your premiums with pre-tax dollars, you won't be able to take a tax deduction for them.

Many states require employers to pay at least 50% of health insurance premiums, so be sure to check your state laws.

For those looking to save on health insurance premiums, there are a few options to consider. Health savings accounts (HSAs) allow employees to set aside pre-tax dollars for medical expenses, with contributions limited to $4,300 for self-only coverage and $8,550 for family coverage in 2025.

Employers can contribute to HSAs, but employees own the funds and can roll them over to the next year. This means employees can take their HSA funds with them if they leave a company. Employers can also reimburse employees for medical expenses through health reimbursement arrangements (HRAs), which can be used to pay for premiums as well.

Here are some key contribution limits for HSAs and HRAs:

Keep in mind that these limits may change over time, so it's essential to check the latest information.

Health reimbursement arrangements can be a great way for employees to save on medical costs. An employer can reimburse employees for medical costs, including payments on premiums, using nontaxable funds.

With HRAs, employees can choose the health plan they want or need. Take a look at three HRA options available to employers.

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is available for small employers who are not required to purchase company health insurance under the Affordable Care Act (ACA). Small employers can reimburse up to $6,350 for single employees or $12,800 for family coverage in 2025.

Only small employers can set up and take advantage of a QSEHRA standalone plan. You can reimburse employees for individually-obtained premiums and any qualifying medical expenses.

The employer contribution to an Excepted Benefit Health Reimbursement Arrangement (EBHRA) for 2025 is $2,150. Any employer, regardless of size, can create an EBHRA.

You must also have a traditional health insurance plan in place to offer an EBHRA. Reimbursements under EBHRAs cover any premiums not included in your traditional group plan, such as dental insurance.

You can contribute up to $4,300 each year for self-only coverage to a health savings account (HSA) for 2025.

An HSA is a type of savings account specifically designed to help pay for or reimburse for certain medical expenses. To be eligible for an HSA, you must have a high deductible health plan (HDHP).

If you contribute to an employee's HSA and they don't, the employee still owns the funds. You can also roll over funds to the following year, and the rollover funds do not count toward that year's maximum contribution.

For 2025, individuals can contribute up to $8,550 per year for family coverage to a health savings account.

Here are the contribution limits for HSAs:

The contribution you make to your HSA is 100% tax-deductible up to a limit, and you can deduct the employee contributions before withholding taxes.