When it comes to managing expenses, small business owners are always looking for ways to maximize deductions and reduce their tax burden.
One common question I hear is: “Can I deduct health insurance costs for my business?” The short answer is yes, but the details depend on your business structure and the type of coverage you provide. Here’s what you need to know.
Health Insurance Deductions for Sole Proprietors
If you’re a sole proprietor or own a single-member LLC, deducting health insurance premiums is relatively straightforward. You can claim the cost of your health insurance as an “above-the-line” deduction on your personal tax return, which means you don’t have to itemize deductions to take advantage of it. However, keep in mind that certain eligibility rules apply, and it’s wise to consult with a tax professional to ensure accuracy.
Deductions for Businesses Offering Employee Health Insurance
For small businesses that provide health insurance to employees, there’s good news: the premiums you pay are fully deductible as a business expense. This includes coverage for your employees’ spouses and dependents if they’re part of the plan.
If you’re part of a partnership, an LLC with multiple members, or own more than 2% of an S corporation, the rules can get a bit more complex. In these cases, health insurance deductions might flow through to your personal return, depending on how the business is structured. That’s where professional tax guidance can make a big difference.
For employees, health insurance contributions aren’t directly deductible on their personal tax returns. However, if your business offers a Section 125 Plan, also known as a Premium Only Plan (POP), employees can pay their portion of premiums with pre-tax dollars. This reduces their taxable income, resulting in more take-home pay.
Health Savings Accounts (HSAs) and High Deductible Health Plans (HDHPs)
If your business offers a High Deductible Health Plan (HDHP), your employees may be eligible to open a Health Savings Account (HSA). As an employer, any contributions you make to your employees’ HSAs are tax-deductible for your business.
HSA contribution limits for 2024:
• Self-only coverage: $4,150
• Family coverage: $8,300
• Catch-up contribution (age 55+): Additional $1,000
For 2025, these limits are slightly higher:
• Self-only coverage: $4,300
• Family coverage: $8,500
• Catch-up contribution remains at $1,000
Pairing an HDHP with a POP can significantly reduce payroll taxes—potentially saving your business 25% to 40% on payroll deductions.
Additional Deduction Opportunities
Even if you’re not offering a traditional group health insurance plan, there may still be tax advantages available. For example, businesses with fewer than 50 employees can set up a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). This allows you to reimburse employees for certain medical expenses, including health insurance premiums, without those reimbursements being considered taxable income.
QSEHRAs can be a flexible, cost-effective option for small businesses that want to support employee health without the complexity of managing a group health plan.
Why Staying Informed Matters
Tax laws are constantly evolving, and what’s deductible this year may change the next. Federal and state regulations vary, and the details can be complicated. That’s why it’s essential to work with a CPA or tax professional who understands the nuances of business deductions, especially when it comes to health insurance.
Final Thoughts
Offering health insurance isn’t just about tax savings—it’s a smart strategy for attracting and retaining top talent. It also helps create a healthier, more productive workforce, which benefits your business in the long run.
If you have questions about how health insurance deductions apply to your business, I’m here to help.
If you’re a sole proprietor or own a single-member LLC, deducting health insurance premiums is relatively straightforward. You can claim the cost of your health insurance as an “above-the-line” deduction on your personal tax return, which means you don’t have to itemize deductions to take advantage of it. However, keep in mind that certain eligibility rules apply, and it’s wise to consult with a tax professional to ensure accuracy.
Deductions for Businesses Offering Employee Health Insurance
For small businesses that provide health insurance to employees, there’s good news: the premiums you pay are fully deductible as a business expense. This includes coverage for your employees’ spouses and dependents if they’re part of the plan.
If you’re part of a partnership, an LLC with multiple members, or own more than 2% of an S corporation, the rules can get a bit more complex. In these cases, health insurance deductions might flow through to your personal return, depending on how the business is structured. That’s where professional tax guidance can make a big difference.
For employees, health insurance contributions aren’t directly deductible on their personal tax returns. However, if your business offers a Section 125 Plan, also known as a Premium Only Plan (POP), employees can pay their portion of premiums with pre-tax dollars. This reduces their taxable income, resulting in more take-home pay.
Health Savings Accounts (HSAs) and High Deductible Health Plans (HDHPs)
If your business offers a High Deductible Health Plan (HDHP), your employees may be eligible to open a Health Savings Account (HSA). As an employer, any contributions you make to your employees’ HSAs are tax-deductible for your business.
HSA contribution limits for 2024:
• Self-only coverage: $4,150
• Family coverage: $8,300
• Catch-up contribution (age 55+): Additional $1,000
For 2025, these limits are slightly higher:
• Self-only coverage: $4,300
• Family coverage: $8,500
• Catch-up contribution remains at $1,000
Pairing an HDHP with a POP can significantly reduce payroll taxes—potentially saving your business 25% to 40% on payroll deductions.
Additional Deduction Opportunities
Even if you’re not offering a traditional group health insurance plan, there may still be tax advantages available. For example, businesses with fewer than 50 employees can set up a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). This allows you to reimburse employees for certain medical expenses, including health insurance premiums, without those reimbursements being considered taxable income.
QSEHRAs can be a flexible, cost-effective option for small businesses that want to support employee health without the complexity of managing a group health plan.
Why Staying Informed Matters
Tax laws are constantly evolving, and what’s deductible this year may change the next. Federal and state regulations vary, and the details can be complicated. That’s why it’s essential to work with a CPA or tax professional who understands the nuances of business deductions, especially when it comes to health insurance.
Final Thoughts
Offering health insurance isn’t just about tax savings—it’s a smart strategy for attracting and retaining top talent. It also helps create a healthier, more productive workforce, which benefits your business in the long run.
If you have questions about how health insurance deductions apply to your business, I’m here to help.
Ready to discuss your tax situation?
Schedule a consultation by phone: (916) 800-5600
Yana Smolin
Smolin & Co CPA
www. www.smolincpa.com