Small businesses have many options to consider for health insurance benefits, including their impact on business taxes. Plenty of business expenses are eligible for tax write-offs, so many employers wonder whether health insurance premiums can be deducted.
Fortunately, small businesses can deduct most of their health insurance premiums and other expenses from their federal business taxes.
There are several ways employers might be able to write off health insurance-related expenses or deduct them from your year-end taxes.
In this post, we explore how employers can take advantage of tax benefits for various health insurance scenarios, including HSAs, tax credits, and deducting premiums.
How small businesses can deduct health insurance premiums
All small employers need to report the value of employees’ health insurance coverage on their W-2 tax form. This way, the government can incentivize companies to provide qualified health plans by offering ways to lower taxes.
The contributions made to employees’ small group health insurance benefits are tax-exempt. That means health insurance premiums paid by an employer are not subject to income or other taxes.
The amount that a company spends offering group health insurance for employees (or making contributions to their healthcare costs) can usually be fully deducted as a business expense. So, the amount you pay toward employee healthcare premiums is usually tax deductible. The contributions you make to employees’ premiums are considered a business expense by the IRS, giving you the ability to write off that cost.
To use this deduction, employers typically must pay at least half of their full-time equivalent employees’ premiums. You should consider all employees who perform services during the tax year when determining your number of full-time equivalent employees, and calculate the average annual salaries and premiums paid. You are not required to make payments toward dependent premiums to receive a tax deduction.
In many cases, you can also set aside tax-advantaged dollars for employees to buy coverage on their own. Qualifying small businesses can fund special health reimbursement accounts for employees that are used to purchase individual or family health insurance. Meanwhile, employees’ own contributions toward their monthly premiums can often be deducted from their payroll on a pre-tax basis. Some states have additional rules and restrictions.
HSA and HRA tax advantages
Similarly to health insurance premiums, Health Savings Account (HSA) contributions are not subject to Social Security, Medicare or federal income taxes. Earnings in an HSA are generally tax-exempt, and contributions can be excluded from an employee's income.
Contributions to employee HSAs are also deductible business expenses, if the money is used to pay for qualified medical expenses. So, if HSAs are part of your group health insurance plan, contributions from both your business and your employees are typically tax deductible up to annual limits.
The annual limit on HSA contributions depends on your type of health plan (e.g. High Deductible Health Plan), your age and your eligibility.
These tax advantages can be used in several ways. For example, employees can make pre-tax contributions to HSAs or to premiums for group health insurance.
Health Reimbursement Arrangements (HRA) are tax-advantaged, employer-funded healthcare accounts that are tax-deductible for your business, and Federal Insurance Contributions Act payroll taxes do not apply. For employees, HRA reimbursements are completely tax-free and excluded from their gross income.
SHOP and Small Business Health Care Tax Credit
Small businesses also have access to provisions under the ACA that include the ability to purchase health insurance through the Small Business Health Options Program (SHOP) and access to the Small Business Health Care Tax Credit.
For information about state-based SHOPs participating in the insurance-buying process, see the Centers for Medicare & Medicaid Services FAQs about flexibilities for state-based SHOP direct enrollment.
Small business healthcare tax credits are widely available for small employers that provide employees with affordable health insurance coverage. To be eligible for the Small Business Health Care Tax Credit, companies must:
Have fewer than 25 full-time equivalent employees and pay average wages under $53,000 per year.
Offer a qualified group health insurance policy through the SHOP Marketplace.
Pay at least 50% of the healthcare plan’s premium cost for each employee.
Qualifying employers may receive up to 50% of the contribution made toward employee premium costs as a credit. Businesses do not need to offer coverage to part-time employees in order to be eligible, but these employees may count toward full-time equivalent employee totals.
The tax credit is available to eligible employers for two consecutive years, with a maximum of:
50% of premiums paid for small business employers
35% of premiums paid for small tax-exempt employers
The tax break for your business works on a sliding scale, with larger credits for smaller employers.
For calculating the healthcare tax credit, one full-time equivalent employee equals 2,080 hours per year, according to the IRS. This differs from other ACA provisions that count 30 hours per week as full-time employment.
As an added bonus, even if your business does not owe taxes in a particular year, you can carry the credit back or forward to other tax years. Plus, the payment for health insurance premiums would exceed the total tax credit, meaning eligible small businesses could still claim a business expense deduction for the remainder of premium costs. That would lead to both a credit and a deduction for employee premium payments for the year.
Note: A self-employed individual can deduct many healthcare-related insurance premiums for themself, a spouse and dependents if they are not eligible to get insurance through an employer or a spouse's employer. The policy can use the name of the individual or the name of the business.
Smart businesses have good insurance and benefits. The best way to find good insurance and benefits is through a broker, consultant, or advisor who knows what you need and can get you the best tax advantage solutions. Especially with HSAs and HRAs.
Always check current tax rules and your specific situation with both your broker and your CPA.
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