Are health insurance costs tax-deductible?

Knowing which business expenses are eligible for deductions is important during tax time. Employers often want to know if the health insurance they purchase for themselves or their employees is deductible. While the short answer is “yes,” it may vary based on the type of insurance or health benefit the employer has. Similarly, employee write-offs depend on their coverage or health expenses.

In this article, we’ll go over various situations where business owners and employees can deduct healthcare costs. While you should always consult with a tax advisor for specific guidance, the tips in this blog will point you in the right direction.

Health insurance tax deductions for employers

When an employer offers a formal health benefit, they can generally write it off as a business expense. The Internal Revenue Service (IRS) allows employers to deduct a few healthcare benefits.

The following are common types of tax-deductible plans and contributions:

1. Group health insurance premium payments
2. Health reimbursement arrangement (HRA) reimbursements
3. Health savings account (HSA) contributions

These benefits also provide employees with tax advantages. Your employees can pay for group plan premium or make HSA contributions through pre-tax payroll deductions. This reduces their overall tax burden.

For employers, HRA reimbursements are exempt from payroll taxes, like FICA or FUTA. Reimbursements are income-tax-free for employees if they have the right type of coverage. For example, to receive tax-free reimbursements with a qualified small employer HRA (QSEHRA), employees must have health coverage that meets minimum essential coverage (MEC) standards.

Health insurance tax deductions for the self-employed

If you’re self-employed as a sole proprietor, S corp owner, or a partnership/LLC member, you may have other opportunities to deduct health expenses from your taxes.

Most self-employed individuals who pay for health, dental, and qualified long-term care can deduct the cost of premiums. Premium payments made for spouse and dependent coverage can also be tax-deductible.

Here’s how to deduct your premiums:

• Use IRS Form 7206 to calculate the amount of the premiums you can deduct¹
• Enter the total amount from Form 7206 on page one of Form 1040². This shows the amount isn’t dependent on itemizing deductions.
  • Even if you choose the standard deduction, this method will still lower your adjusted gross income (AGI).

To be eligible to claim this tax break, you can’t deduct more than your business’s profit, and your profit can’t be a tax loss. You also can’t claim a deduction for any months you were eligible for an employer-sponsored health insurance plan.

“Health insurance costs for employees can be a significant expense for small business owners, but they often bring valuable tax advantages,” said Firdaus Syazwani, Founder of Dollar Bureau³. “It's crucial for business owners to consult with a CPA or tax professional to ensure they’re complying with local tax laws and maximizing potential deductions. Each business situation is unique, and tailored professional advice is invaluable.”

Health insurance tax credits for employers

Besides the standard tax deductions, some small employers may qualify for the small business health care tax credit. This credit helps small businesses buy qualified health insurance plans on the Small Business Health Options Program (SHOP) Marketplace.

If you live in a county without a SHOP Marketplace, you may still be eligible for a small business health tax credit. To qualify, your non-SHOP health coverage must meet the rules for the credit that applied before 2014⁴.

You’re eligible for the tax credit if you meet all four of the following requirements⁵:

1. You have fewer than 25 full-time equivalent employees (FTEs)
2. You pay your employees an average wage of $56,000 or less each year
3. You offer a SHOP plan to your full-time employees
4. You pay at least 50% of your employees’ premiums

Qualifying employers may receive up to 50% of their contributions toward employee premiums in tax credits. You’ll receive the highest credit amount if you have fewer than ten employees and pay them an average annual salary of $27,000 or less.

To calculate the tax credit, use IRS Form 8941 and attach it to your tax return⁶.

Health insurance tax deductions for employees

In a few cases, employees can claim tax deductions on payments made toward health insurance premiums. If the employee pays for premiums through pre-tax payroll deductions or can be reimbursed through an HRA, they can’t claim a deduction. They can also deduct a few other types of benefits.

Below are other insurance benefits that are tax-deductible for employees:

• COBRA premiums
• Medicare Part B, Part C, and Part D premiums
  • Most Part A recipients don’t pay premiums. But suppose you do pay Part A premiums. In that case, you can write them off if you aren’t enrolled in the plan under Social Security and have never paid the Medicare tax as a government worker.
• Qualified long-term care insurance premiums

You can only deduct Medicare and COBRA premiums if you itemize your deductions. Plus, you’re only eligible to deduct qualifying medical expenses that are more than 7.5% of your AGI for the year.

Lastly, premium tax credits can lower the entire cost of health insurance coverage for individuals. But, if you receive advance premium tax credits, you can’t deduct them. You can only write off your out-of-pocket premium costs.

Other tax-deductible medical expenses

Health insurance policy premiums aren’t the only expenses you can write off. A few other out-of-pocket expenses are also deductible.

Tax-deductible out-of-pocket medical costs include:

• Dental expenses, including insurance premiums
• Prescription medications
• Therapy
• Contact lenses and prescription eyeglasses
• Birth control
• Preventative care costs
• Certain treatments and surgeries

You can even deduct travel expenses, like the cost of gas, incurred when getting medical care. For the complete list of eligible items, see IRS Publication 502 expenses⁷.

Should you choose the standard deduction or itemized deduction for personal medical expenses?

When deciding whether to use the standard or itemized deduction, you must consider your income and medical expenses. Remember, you can only deduct medical expenses that are more than 7.5% of your AGI.

For example, if your AGI is $56,000, you can only deduct medical expenses greater than $4,200 on your federal income tax return. If your out-of-pocket expenses exceed the standard deduction, itemizing them will get you more money back on your tax return.

It’s a good idea to consult a tax advisor to determine which filing method is best for you.

What health benefits aren’t tax-deductible?

While many tax-deductible medical costs exist, the IRS doesn’t consider everything a write-off. For example, employees can’t deduct any healthcare expenses you reimbursed them for. This is because they’re essentially receiving money back for those costs. Additionally, health stipends aren’t tax-deductible.

Health stipends are a flexible benefit option with fewer restrictions than formal perks. They’re easy to administer, cover a wide range of expenses, and can coordinate with premium tax credits. But, the IRS considers them taxable income for employees. So, your staff must pay income tax on their stipend, and you won’t get any tax breaks as an employer.

For employees, some popular forms of ancillary coverage aren’t eligible for tax deductions, such as the following:

• Life insurance premiums
• Premiums for plans that cover only loss of life, limbs, or sight
• Any supplemental plan that provides a guaranteed cash allowance for hospitalization

Conclusion

Knowing how different types of health coverage impact taxes can help employers and employees pay less tax each year. It can also help employers choose the right health benefit for their company so their staff can get the most cost-effective care possible.

If you’re an employer looking for tax savings, an HRA can help you save money on your payroll taxes. If you’re interested in offering a tax-advantaged HRA, contact a PeopleKeep HRA specialist to learn more.

This blog article was originally published on February 25, 2016. It was last updated on August 16, 2024.

1. https://www.irs.gov/forms-pubs/about-form-7206

2. https://www.irs.gov/forms-pubs/about-form-1040

3. https://dollarbureau.com/ 

4. https://www.irs.gov/pub/irs-drop/n-18-27.pdf

5. https://www.healthcare.gov/small-businesses/provide-shop-coverage/small-business-tax-credits/

6. https://www.irs.gov/instructions/i8941

7. https://www.irs.gov/pub/irs-pdf/p502.pdf