Tax strategy is an essential component of any small business plan. Many of the most successful small business owners carefully study tax code, consult qualified tax professionals, and make decisions based on their tax consequences. In recent years, many of those decisions have pertained to healthcare in general and the Affordable Care Act specifically. One strategy in particular has garnered attention from savvy small business owners looking for tax-friendly ways to offer health benefits to their employees. That strategy, commonly called health insurance premium reimbursement, helps companies to offer their employees monthly real dollar contributions as reimbursement for qualified medical expenses. These reimbursement contributions offer several specific tax advantages.
Income Tax Benefits
Under Section 105 of the tax code, employers are allowed to reimburse employees for qualified health expenses, including individual health insurance premiums. These arrangements, known as medical reimbursement plans, allow for premium reimbursements to be passed from employer to employee entirely tax free. In other words, an employee of a small business can purchase an individual health insurance policy on the healthcare exchange and receive a tax-free reimbursement for that purchase.
Payroll Tax Benefits
For many small businesses, payroll is one of the largest expenses to hit the books each month. Most of that expense, of course, can be attributed to the salaries and wages of employees. Some of it, however, comes from payroll taxes, or the percentage of salaries paid to the federal and/or state government. Because these real dollar contributions are reimbursements for qualified expenses and not a form of salary, they are not subject to payroll tax. Decreasing payroll taxes, of course, can have major benefits for small businesses, which sometimes operate on tight monthly budgets.
While there are several direct tax benefits associated with health insurance premium reimbursement, other advantages are less obvious. For example, many Americans that don’t get health insurance through their work are eligible for tax credits, or discounts on individual health policies. Of course, eligibility is dependent upon several factors, including income level. In order to qualify for these subsidies, buyers must purchase a policy through their state’s healthcare exchange.
Savvy business owners and smart employees make financial decisions with their tax consequences in mind. These tax-minded small business owners have increasingly been drawn to medical reimbursement plans as a means of offering tax-free health benefits to their employees. Considering the savings they offer on income tax and payroll tax, it’s no surprise that these plans are being adopted by more and more small businesses in the United States.
What do you think? What questions do you have about Tax Benefits? Leave a comment or question below.