How Employers Deduct Group Health Insurance Premiums
Premiums a business pays for employee health coverage are generally deductible as an ordinary business expense. The deduction lowers taxable income whatever the business structure, but who counts as an employee, and how the owner’s own premiums are handled, depends on the entity type.
What the Deduction Covers
Premiums for Employees
The employer’s share of the premium for common-law employees is generally deductible as an ordinary and necessary business expense, which reduces the business’s taxable income.
Coverage for Families
A health plan can cover an employee’s spouse, dependents and children who are under age 27 at the end of the tax year. The employer’s contribution toward that coverage is part of the cost of providing the plan.
Employer HSA Contributions
Employer contributions to employees’ health savings accounts are generally deductible as well, and the contributions are excluded from the employees’ wages.
Where the Deduction Appears by Entity Type
The premium is deducted in every case, but the return, and the owner’s own treatment, differ. Open the guide for your entity type.
Corporations
A C corporation deducts the premiums on its own return, including the owner-employee’s coverage when the owner is a real employee on the payroll.
S Corporations
The corporation deducts the premiums it pays. For an owner with more than 2 percent ownership, the premium is also reported as wages and the owner deducts it personally.
Partnerships
The partnership pays or reimburses a partner’s premiums as guaranteed payments, and the partner takes the personal deduction. Employees’ premiums are an ordinary partnership expense.
Sole Proprietors
Premiums for the owner’s employees go on Schedule C. The owner’s own premiums are a separate personal deduction on the return.
Conditions for the Business Deduction
The Business Pays the Premium
Only the employer’s share is the business’s expense. The part an employee pays from pay is the employee’s money, not a business deduction.
Real Employees
The simple case is coverage for common-law employees. Owners are handled by entity type, which is why the four entity guides exist.
Plan and Carrier Rules
The plan still has to meet the carrier’s participation and contribution requirements, and a cafeteria plan cannot favor owners and highly compensated employees.
Records That Support It
Carrier invoices, the plan documents and payroll records that show who was covered and what the employer paid are what a CPA needs to support the deduction.
Common Problems With the Business Deduction
Deducting the Employee’s Share
The employer deducts what it pays. The portion an employee pays through payroll is not a second deduction.
Treating Owner Premiums Like Employee Premiums
An S corporation owner with more than 2 percent ownership, a partner or a sole proprietor is not treated as an ordinary employee, so the owner’s own premium follows the entity rules instead.
Forgetting the Credit Changes the Deduction
If a small employer claims the Section 45R credit, the deduction for the premiums must be reduced by the credit amount. See the small business tax credit guide.
Business Deduction Questions
Are group health premiums fully deductible?
The employer’s share of premiums for employees is generally deductible as a business expense. The owner’s own coverage follows the entity rules.
Is it a deduction or a credit?
Normally a deduction. Small employers who qualify may also claim a separate Section 45R credit, in which case the deduction is reduced by the credit.
Does the employee’s share count?
No. Only what the employer pays is the business’s expense.
Does the deduction change if the business is an LLC?
It follows how the LLC is taxed: as a sole proprietorship, a partnership, or a corporation.
What about employer HSA contributions?
They are generally deductible and are excluded from the employee’s wages. See how the employee exclusion works.
Who should confirm my situation?
Your CPA. We can document the plan and contribution so the premium records support the return.
CFH are licensed insurance brokers, not tax advisors, and this page is general information rather than tax advice. Ownership, family relationships and how the business is taxed all change the result, so confirm your own treatment with your CPA. Our clients also have access to CPAs and attorneys through the firm.
Where These Rules Come From
IRS: Instructions for Form 7206, Self-Employed Health Insurance Deduction · S Corporation Compensation and Medical Insurance Issues · Notice 2008-1 · Publication 15-B, Employer’s Tax Guide to Fringe Benefits
Related Guides
Related reading: Tax Benefits of Group Health Insurance for Owners · C Corporation Owners · S Corporation Owners With More Than 2 Percent · Sole Proprietors · Partners and LLC Members · Small Business Health Care Tax Credit · Section 125 Tax Savings Calculator
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