How Do Small Business Health Insurance Tax Deductions Work?

Small Business

How Do Small Business Health Insurance Tax Deductions Work?

Updated on November 01, 2019

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Updated April 15, 2019

How do small business health insurance tax deductions work?

Small business employers can deduct most of their health insurance-related expenses from their federal business taxes. Keep reading to learn more about small business taxes and deductions for your health insurance costs.

How do small business health insurance tax deductions work?

Like larger companies, small businesses are typically able to deduct some of their health insurance-related expenses from their federal business taxes. When it comes to small business taxes, there are a plenty of health insurance-related expenses you might be able to deduct.

For example, as a small business owner:

  • You can usually deduct premiums from small business taxes
  • You can usually deduct contributions to an HSA from small business taxes
  • And, in many cases, you can set aside tax-advantaged dollars to help employees buy coverage on their own

Luckily for you and your employees, small business health insurance tax deductions can help make offering health coverage more of a possibility by helping out financially when it comes to your small business taxes. Let’s look at each of these small business tax deductions in more detail.

Monthly premiums

First, when you offer small business health insurance, the amount of money that you pay toward the monthly premiums of your employees is usually tax deductible.

The money that employees contribute toward their own monthly premiums can usually be deducted from their payroll on a pre-tax basis. This means that you deduct the monthly premium cost from the paychecks of employees before federal and state taxes are calculated and deducted.

As a result, employees can get the tax benefits of increased take-home pay and reduced taxable income.

Health Savings Account (HSA)

Second, if the health plan you offer is eligible for use with a Health Savings Account (HSA), the contributions you and your employees make to these accounts are also typically tax deductible up to annual limits.

As per the IRS, note that the annual limit on contributions to your HSA depends on:

  • Your type of high-deductible health plan (HDHP)
  • Your age
  • The date you became eligible
  • The date you cease to be eligible

So long as you use the money in your HSA to pay for qualified medical expenses, you generally will not need to pay small business taxes on it.

The IRS defines qualified medical expenses as expenses that would generally qualify for the medical and dental expenses deduction. With the exception of insulin, non-prescription medicines are not considered qualified medical expenses for HSA purposes.

Tax-advantaged dollars

Finally, if you’re a small business owner who can’t afford to sponsor a group health insurance plan, but you want to help your workers buy coverage, you can often do that in a tax-advantaged way, too.

Under federal law, qualifying small businesses can now fund special health reimbursement accounts for their employees to purchase individual or family health insurance. Within limits, the money deposited into the account is tax-deductible for qualifying small businesses.  Some states have additional rules and restrictions.

For example, eligible small businesses with less than 50 employees can offer a qualified small employer health reimbursement arrangement (QSEHRA), which is not a group health plan, to their employees.

A QSEHRA provides for the payroll tax-free reimbursement of employee medical expenses through a monthly allowance offered by the small business employer. The business then reimburses employees up to the amount of their allowance.

Overall, small businesses have a variety of options to consider for their small business taxes when it comes to health insurance coverage.

This video is not designed as tax advice for your specific situation. So, for more information about your eligibility for tax deductions or credits, contact your accountant or licensed tax professional.

To learn more about your small business health insurance options today, visit eHealth.com.

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