Offering group health insurance is one of the best things you can do for your team—and can be one of your bigger expenses. Gusto data shows the median small business health insurance premium in America has risen 23% since 2022.
But offering health insurance might be less costly than you think. Thanks to health insurance tax deductions, some of the money you spend can come back your way.
Two quick notes before we dig in. This post assumes you have at least one W-2 employee besides yourself. Also, if you have fewer than 50 full-time employees, you're not required to offer coverage at all. But plenty of small businesses do it anyway, and these tax breaks can help.
Follow along as we highlight the main tax deductions, breaks, and credits you could get in exchange for offering health insurance.
4 tax benefits of employer-sponsored health coverage
If you offer a healthcare plan to employees, the tax code helps offset the cost in a few ways:
Your health insurance contributions are tax deductible. Your share of employee premiums is a tax deductible business expense, similar to rent or payroll.
You save payroll tax on every dollar you contribute. If you gave your team that same money as extra wages, you'd owe payroll tax on it. But the IRS doesn't count premium payments as wages, so you don't owe Social Security, Medicare, or unemployment tax on what you put toward coverage.
A premium-only plan (POP) lets your team pay their share pre-tax, reducing your payroll taxes. With a POP, a type of Section 125 cafeteria plan, employees' premiums are pre-tax, which reduces their taxable wages. This reduces payroll size, decreasing payroll taxes.
Adding an HSA multiplies your payroll tax savings. Employer HSA contributions are exempt from payroll tax the same way premiums are (remember that HSAs have to be paired with a high-deductible health plan). More companies are choosing HSA-eligible plans as premiums increase.
Premiums are climbing fastest for the smallest teams. With Gusto, it's easy to compare plans at renewal and administer a compliant plan, including the Section 125 document that makes these tax savings possible.
Bonus: If you have fewer than 25 full-time equivalent employees, you may qualify for the small business health care tax credit. It's worth up to 50% of what you pay toward employee premiums, taken directly off your tax bill. To qualify, you also need to have average annual wages below the IRS threshold, cover at least 50% of each employee's premium, and buy coverage through the SHOP Marketplace rather than through a broker.
How much employers can save with health insurance tax benefits
Your savings from health insurance tax deductions will vary based on the marginal tax rate, your choice of a POP plan or not, and employer contributions. See why:
Your marginal tax rate. A deduction lowers your taxable income, so what it saves matches your tax rate. In the 24% tax bracket, every $100 you spend on premiums reduces your tax bill by $24. At 12%, the same $100 saves you $12.
If you've set up a premium-only plan. POPs give you those extra savings on payroll tax because employee pre-tax contributions lower their taxable wages.
How much you contribute per employee. Higher contributions increase total savings. The tax break is a percentage, so higher employee contributions means more money back.
For example, let’s say you run a 10-person business taxed as an S corporation. We’ll assume that you’re in the 24% federal bracket, and that you cover $200 per month of each employee's premium. With these example numbers, you’d pay about 39% less than the premium sticker price.
Your premium contributions | $24,000 |
Less: business expense deduction | −$5,760 |
Less: payroll tax that doesn’t apply to your contributions | −$1,836 |
Less: payroll tax saved when your team pays pre-tax | −$1,836 |
Your real cost | $14,568 |
These numbers are for illustration only. Consult your accountant about your specific situation.
If a group plan isn’t the right fit for your business, look into a health reimbursement arrangement (HRA), an alternative to group coverage. Employer reimbursements are deductible to you and tax-free to your employee, with no payroll tax either way.
Quick note: This is not to be taken as tax advice. Since tax rules change over time and can vary by location and industry, consult a CPA or tax advisor for specific guidance.
FAQs
Can business owners get health insurance through their own company’s plan?
Usually yes, but you may not be able to pay for it pre-tax. Sole proprietors and partners are excluded from Section 125 pre-tax payroll deductions, as are S corporation shareholders who own more than 2% of the company. That also means no health FSA or dependent care FSA. You'd claim the self-employed health insurance deduction on your personal return instead, capped at your net profit. C corporation owner-employees are the exception and get full pre-tax treatment.
Can a sole proprietor deduct health insurance premiums on Schedule C?
Only the premiums you pay for employees. Those are a business expense on Schedule C and reduce both income tax and self-employment tax. Premiums for your own coverage go on Schedule 1 instead as the self-employed health insurance deduction, which lowers income tax but doesn't reduce self-employment tax.
Do employees pay taxes on health insurance their employer provides?
No. Premiums an employer pays for employees, their spouses, and dependents aren't treated as wages, so they're exempt from federal income tax withholding, Social Security, Medicare, and unemployment tax. If employees pay their share through a POP, that portion comes out pre-tax as well, lowering their taxable income.
Can employees deduct their health care premiums?
When you offer a POP, employees can’t deduct their premiums from taxes, but their share is coming out pre-tax, reducing their taxable income. Premiums paid after tax are deductible as qualified medical expenses. Employees can always deduct out-of-pocket costs by taking itemized deductions on Schedule A, such as deductibles, co-pays, prescriptions, above 7.5% of adjusted gross income (AGI).
What can employees spend HSA money on?
HSA money can be used for qualified medical expenses as defined in IRS Publication 502. That includes doctor and dentist visits, prescriptions, hearing aids, wheelchairs, eyeglasses and contact lenses, and long-term care insurance premiums up to age-based limits. Gym memberships, cosmetic procedures, and most over-the-counter drugs don't qualify.
