Understanding which expenses are eligible for write-offs and deductions is important during tax time. Employers often ask us, “Is health insurance tax-deductible?” While the short answer is yes, there are differences in how organizations and individuals can get tax breaks on health insurance premiums and medical expenses.
In this article, we’ll explore how employers can save with tax advantages for various health insurance scenarios. You should always consult with a tax professional to see how you can get the most out of your tax return. However, the tips in this blog should get you started in the right direction.
Health insurance tax deductions for employers
When an employer offers a formal health benefit, the expense can generally be written off as a business expense. The Internal Revenue Service (IRS) allows employers to deduct a few different healthcare benefits.
Common types of tax-deductible benefit plans and contributions are:
- Payments made to group health insurance premiums
- Reimbursements made through a health reimbursement arrangement (HRA)
- Contributions made to health savings accounts (HSA)
In each of these scenarios, employees also receive tax advantages. Your employees can pay for group health insurance premiums or HSA contributions with pre-tax money through payroll deductions.
With an HRA, all eligible reimbursements made through the plan aren’t subject to payroll taxes such as FICA or FUTA. Reimbursements received by your employees through an HRA are tax-free and aren’t included in your employees’ gross income as long as the employee has minimum essential coverage (MEC).
Health insurance tax deductions for the self-employed
If you’re self-employed or a partnership/LLC member, you may have additional opportunities for health insurance deductions compared to other employers.
Most self-employed individuals can deduct insurance premiums, including dental and qualified long-term insurance coverage.
You’ll enter this amount on page one of IRS Form 10401, which means the benefit isn’t dependent on itemizing deductions. You can use this even when you elect to take the standard deduction. This value reduces your adjusted gross income (AGI).
To be eligible, you can’t deduct more than your business profit, and your profit can’t be a tax loss. You also can’t qualify for employer-provided insurance from another job or spouse.
Can you claim health insurance premiums on your taxes as an employee?
As an employee, you can deduct any out-of-pocket health insurance premiums that haven’t been reimbursed through a stipend or an HRA. COBRA and Medicare premiums can also be tax-deductible.
You can reimburse Medicare Part B, Part C, and Part D on your tax return. You can also write off Medicare Part A premiums if you aren’t enrolled in the plan under Social Security and have never paid Medicare tax as a government employee. Most Medicare Part A recipients don’t pay premiums, so there’s often no expense to deduct.
You can only deduct Medicare and out-of-pocket medical expenses that exceed 7.5% of your adjusted gross income as itemized deductions on your personal income tax returns. Employees can also deduct long-term care insurance premiums on their tax returns.
If you receive premium tax credits, you can’t deduct the amounts your advance premium tax credits paid for. You can only write off the out-of-pocket costs that you paid.
Should you chose the standard deduction or itemized deduction for personal medical expenses?
Employees must consider their income and medical expenses when deciding whether to take the standard deduction or itemize it.
To determine which deduction to take, you must calculate the deductible amount. Remember, you can only deduct medical expenses greater than 7.5% of your adjusted gross income.
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 medical expenses and other expenses exceed the standard deduction, choosing the itemized deduction will allow you to get more money back on your tax return.
It’s a good idea to consult a tax professional to determine which filing method is best for you.
Health insurance tax credits for employers
In addition to the standard tax deductions discussed above, some small employers may qualify for a health insurance coverage tax credit.
Introduced as part of the Affordable Care Act (ACA), these tax credits help small businesses that offer qualified health plans through a Small Business Health Options Program (SHOP) Marketplace.
You can take advantage of these tax credits if you meet all four2 of the following requirements:
- Have fewer than 25 full-time equivalent employees (FTEs)
- Pay your employees an average wage of $58,000 or less each year
- You offer an employer-sponsored health insurance plan and cover at least 50% of the premium costs
- You purchased the health insurance policy through the SHOP Marketplace
Qualifying employers may receive up to 50% of the contribution made toward employee premium costs. You’ll receive the highest tax credit benefit if you have fewer than ten employees and pay them an average of $28,000 or less.
You can use IRS Form 8941 to calculate your tax credit. You’ll attach this to your tax return.
Thanks to amended IRS rules, you may still be eligible for a small business health tax credit if you reside in a county without a SHOP Marketplace.
Health insurance tax credits for employees
In addition to health insurance tax credits for employers, tax credits are also available to eligible employees who purchase individual health coverage. Premium tax credits can significantly lower the cost of health insurance for qualified individuals.
Other tax-deductible medical expenses
Health insurance premiums aren’t the only medical expense deductions you can write off on your taxes. Some out-of-pocket expenses are also deductible. So, what kind of medical expenses are tax-deductible?
Deductible out-of-pocket medical costs include:
- Dental expenses, including insurance premiums
- Prescription medications
- Contact lenses and prescription eyeglasses
- Birth control
- Preventative care costs
- Certain treatments and surgeries
You can even deduct travel costs associated with getting medical care. For the complete list of eligible items, see IRS Publication 502 expenses.
What health benefits aren't tax-deductible?
While there are many tax-deductible health costs, the IRS doesn’t consider everything health-related tax-deductible. For example, employees can’t deduct any healthcare expenses you reimbursed them for. That’s because they’re essentially being paid back for those expenses.
If you’re leveraging an HRA to cover your employees’ eligible health expenses, your reimbursements are on a pre-tax basis, which means the money isn’t reported as taxable income as long as your employees have health insurance with MEC. And remember, you can deduct the reimbursements you provide to your employees.
However, if you decide to reimburse employees using a health benefit stipend, that reimbursement is taxable and can’t be deducted. Health stipends are taxable income for your employees, much like a salary. As a result, your employees pay income tax, and you won’t get tax benefits as an employer.
So why would you offer a taxable health benefit like an employee stipend if you don’t get to write the reimbursement off? Health stipends are a great option for organizations with employees who receive premium tax credits, as they’ll still be able to use their credits and the stipend benefit. It also allows for more flexibility, as there are fewer restrictions on eligible expenses.
What other benefits can employers deduct?
Employers can deduct a variety of employee benefits on their business tax returns. Fringe benefits such as life insurance coverage and dependent care assistance can be deducted for employers. You can also deduct workers’ compensation premiums and set-up costs for qualifying retirement plans.
However, unlike health insurance plans, employees can’t deduct out-of-pocket life insurance premiums. The Internal Revenue Service sees life insurance as a personal expense that isn’t required by law.
Knowing the differences between the types of health benefits and what tax credit options are available can help your organization pay fewer taxes each year. It can also help you choose the right health benefit for your employees so they can get the best medical care possible.
Depending on your organization’s health benefit, you can usually write off your health insurance expenses on your taxes. Group health insurance premiums, HRAs, and HSAs are tax-advantaged for employers. Health stipends, however, are subject to taxes for the employer and the employee.
This blog article was originally published on February 25, 2016. It was last updated on April 28, 2023.
Elizabeth Walker is a content marketing specialist at PeopleKeep. She has worked for the company since April 2021. Elizabeth has been a writer for more than 20 years and has written several poems and short stories, in addition to publishing two children’s books in 2019 and 2021. Her background as a musician and love of the arts continues to inspire her writing and strengthens her ability to be creative.