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Small Business Employee Benefits and HR Blog

Healthcare Deductions, Tax Credits, and Subsidies for Small Businesses

With all the talk about healthcare deductions, tax credits, and subsidies, what do small business owners need to know? This article provides a high-level overview of healthcare tax breaks for small businesses.tax_deductions_healthcare

Deductions

Generally speaking, deductions are subtractions that reduce the amount of income that’s taxed. There are three main types of healthcare deductions:

  • Business Deduction. Contributions to a group health plan, such as group health insurance premiums or medical reimbursement plan contributions, are tax-deductible to the business. 

  • Personal "Above-the-Line" Deduction. Many self-employed individuals can deduct health insurance premiums via the line 29 deduction on the 1040 return. If you qualify, the deduction for self-employed health insurance premiums is a valuable tax break. See: Health Insurance Tax Deductions for the Self-Employed.

  • Personal Itemized Deduction. Tax filers are able to deduct the amount of unreimbursed medical expenses in excess of 10% of Adjusted Gross Income (AGI). See: 5 Tips for Medical Expense Tax Deductions in 2013.

Tax Credits

Generally speaking, a tax credit is a subtraction from taxes you otherwise owe. There are two healthcare tax credits small business owners should know about: the individual tax credit and the small business tax credit.

Individual Tax Credit

The individual premium tax credit can be claimed by eligible individuals who buy coverage through their state Exchange (ex: healthcare.gov). This includes self-employed individuals who are treated as individuals, not as small businesses. You are eligible for the individual premium tax credit if:

  • Your household earns between 138% and 400% of the federal poverty level (FPL). As a reference, 400% of FPL is $46,680 for an individual in 2014, and $95,400 for a family of four. See these 2014 FPL Charts.

  • You are not eligible for an employer or government health plan.

The individual premium  caps the cost of health insurance on a sliding scale, between 2 - 9.5% of household income, depending on income.

The individual premium tax credit is advanced payable, which means the discount is applied at the time of purchase. You don’t have to wait to file your tax return in order to benefit from the credit.

Find more details about the individual tax credit.

Small Business Tax Credit

In 2014, the small business tax credit is worth up to 50% of your contribution toward employees' premium costs (up to 35% for tax-exempt employers). The tax credit is highest for small businesses with fewer than 10 employees who are paid an average of $25,000 or less. The smaller the business, the bigger the credit.

To be eligible for the small business healthcare tax credit you must:

  • Be an employer with fewer than 25 full-time equivalent (FTE) employees, and 

  • Pay an average wage of less than $50,000 a year per employee, and

  • Pay at least half (50%) of employee health insurance premiums (for full-time employees only), and

  • Purchase a group health insurance plan through your state's SHOP Marketplace.

Find more details about the small business healthcare tax credit.

Government Subsidies

Generally speaking, a government subsidy is a benefit you receive from the government. Usually, a government subsidy is tax free (not included in taxable income).

In regards to healthcare, the government is offering cost-sharing subsidies to individuals (in addition to the individual premium tax credits). The government subsidies help those who qualify pay for their deductibles, co-payments, co-insurance, and out-of-pocket medical expenses. The cost-sharing subsidies are available for individuals whose household income is between 100% and 250% of the FPL.

Medical Reimbursement Plans as Vehicles for Medical Expense Tax Deductions

Many small businesses set up a tax-advantaged medical reimbursement plan as a vehicle for medical expense tax deductions. There are different types of medical reimbursement plans, including:

  • Health Reimbursement Arrangement (HRA) - An HRA is an employer-funded plan that reimburses employees tax-free for HRA-qualified medical expenses. HRA reimbursement dollars received by an employee are not included as income and therefore do not affect their AGI. 

  • Healthcare Reimbursement Plan (HRP) - An HRP is an employer-funded, limited-purpose Section 105 Plan designed for premium reimbursement. An HRP can be used to reimburse qualified individual and family health insurance premiums. HRP reimbursement dollars received by an employee are not included as income and therefore do not affect their AGI. 

  • Health Savings Account (HSA) - An HSA is a financial account established by an individual to pay for qualified medical expenses tax-free. HSAs must be linked with a qualified high-deductible health insurance plan and anyone can contribute to it.

  • Flexible Spending Account (FSA) - An FSA is a tax-advantaged account that allows an employee to pay for future qualified medical expenses through payroll deduction.

If you're a small business owner, what questions do you have about healthcare deductions, tax credits, and subsidies? Leave a comment and we'll help answer.

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