Tax Benefits of Offering Group Health Insurance as a Business Owner
When a business pays for employee health coverage, the premiums are generally deductible to the business and, for employees, usually free of income tax. What the owner personally receives depends on how the business is organized, and that is where most of the mistakes are made.
Tax Advantages for the Business and Its Employees
These apply to the business and to every employee on the plan, whatever the owner’s entity type.
Premiums Are a Deductible Expense
Premiums the business pays for employee coverage are generally deductible as an ordinary business expense, reducing taxable income.
Employees Are Not Taxed on the Benefit
The value of employer-paid coverage is generally excluded from an employee’s income, so a dollar of premium is worth a full dollar to the employee, not a dollar after tax.
Pre-Tax Premium Deductions Cut Payroll Tax
When employees pay their share through a Section 125 cafeteria plan, that share avoids income tax and Social Security and Medicare tax. The employer also saves its side of payroll tax on those dollars.
Tax-Free Health Savings Contributions
Employer contributions to an HSA paired with a qualifying high-deductible plan are excluded from the employee’s income, and from payroll tax when made through a cafeteria plan.
A Credit May Be Available to Small Employers
Employers with fewer than 25 full-time equivalent employees and below-limit average wages may qualify for a credit for up to two years, when coverage is offered through the SHOP Marketplace.
The Owner Can Be Covered Too
Owners can usually take part in the same plan and receive a tax benefit for their own premiums, but the mechanics differ by entity type, as shown below.
How the Owner Is Treated Depends on the Entity
The same premium can be handled four different ways. Entity type decides whether the benefit is tax-free, deducted on the owner’s return, or reported as wages. Open the guide for your entity type for the full mechanics.
C Corporation Owners
An owner who works in the business is generally treated like any other employee. The corporation deducts the premiums, the owner does not report them as income, and the owner can join the cafeteria plan. The condition is real employee status, which generally means being paid through payroll, so how the owner is paid matters.
S Corporation Owners With More Than 2 Percent
The corporation deducts the premiums, but they must be reported as wages in box 1 of the owner’s W-2. They are generally exempt from Social Security and Medicare tax, and the owner takes an above-the-line deduction on the personal return if the requirements are met. The corporation must pay or reimburse the premium, or the deduction is lost.
Sole Proprietors
The owner is not an employee, so the owner’s premiums are not a Schedule C expense. Instead the owner takes the self-employed health insurance deduction on the personal return, limited to the net profit of the business. It lowers income tax but generally not self-employment tax, and it is lost for any month the owner could have joined a spouse’s subsidized plan.
Partners and LLC Members
The partnership pays or reimburses the premiums and reports them as guaranteed payments, and the partner takes the same self-employed deduction. An LLC follows the rules of the way it is taxed: a single-member LLC like a sole proprietor, a multi-member LLC like a partnership, or as a corporation if it elected that treatment.
Four Rules That Cost Owners the Deduction
These come straight from IRS guidance. Each one is easy to meet if the plan is set up correctly at the start and expensive to fix afterward.
Paying Personally Instead of Through the Business
For an S corporation owner or a partner, a policy bought in the owner’s own name and paid with personal funds does not qualify. The business must pay it, or reimburse the owner and report the amount as wages or a guaranteed payment.
Being Eligible for Another Subsidized Plan
The owner’s deduction is lost for any month the owner or the owner’s spouse could have joined an employer-subsidized plan, even without enrolling.
Deducting More Than the Business Earned
The self-employed health insurance deduction cannot exceed the earnings of the business that established the plan.
Using Tax-Free Accounts as an S Corporation Owner
An S corporation owner with more than 2 percent ownership cannot take part in a flexible spending account or health reimbursement arrangement on a tax-free basis, and is treated differently under a cafeteria plan.
CFH are licensed insurance brokers, not tax advisors, and this page is general information rather than tax advice. Entity type, ownership, and family relationships all change the result, so confirm your own treatment with your CPA. Our clients also have access to CPAs and attorneys through the firm.
Owner Tax Questions
Can I deduct my own premiums if I own the business?
Usually yes, but where the deduction appears depends on your entity type. C corporation owners are treated as employees; S corporation owners, sole proprietors, and partners generally take it on the personal return.
Does the owner count as an employee for a group plan?
Carriers generally require at least one covered employee who is not an owner or the owner’s spouse. An owner-only business usually cannot buy a group plan, and carrier rules vary.
Are employee premiums really tax-free?
Employer-paid premiums are generally excluded from the employee’s income. An employee’s own share is pre-tax only if it is paid through a Section 125 plan.
Why is my S corporation premium on my W-2?
Federal rules require premiums paid for owners with more than 2 percent ownership to be reported as wages in box 1. That reporting is what makes the personal deduction available.
Is there a credit for small employers?
Possibly. Under Section 45R, employers with fewer than 25 full-time equivalent employees and below-limit average wages may qualify when coverage is offered through the SHOP Marketplace. Owners and their family members are not counted.
Who should I ask to confirm my situation?
Your CPA. We can build and document the plan so the premiums are paid and reported the way your entity requires, and your CPA can confirm the return.
Where These Rules Come From
IRS: S Corporation Compensation and Medical Insurance Issues · Instructions for Form 7206, Self-Employed Health Insurance Deduction · Small Business Health Care Tax Credit and the SHOP Marketplace · Notice 2008-1
Related Guides
Related reading: Small Business Health Care Tax Credit · Section 125 Tax Savings Calculator · Starting a First Group Health Plan · Group vs Individual Health Insurance · Benefits for Employers With 2 to 50 Employees · Business Owner Health Insurance Tax Guides · Which Owner Tax Guide Fits You · Owner Health Insurance Tax Savings Estimator · CPA Checklist for Owner Health Insurance Reporting · Hiring a Spouse and Group Health Insurance · ICHRA and QSEHRA Tax Treatment for Owners · HSA Rules for Business Owners · Reimbursing Individual Health Premiums · Adult Children, Domestic Partners and Imputed Income · COBRA Premium Tax Treatment · Self-Insured Plan Nondiscrimination Rules
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