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Health Insurance Deductions & Tax Credits: A Guide for Businesses

Health insurance premiums are a deductible business expense. However, the manner in which you deduct them depends on your business type.

S-Corporation Shareholders and Health Insurance

If you’re a 2% or greater S-Corp shareholder, you can either be reimbursed for health insurance premiums or pay the insurance directly. Ensure the amount paid is reported on a W-2, exempt from self-employment taxes. Learn more about S-Corp deductions

Partnerships and Health Insurance Premiums

Partnerships can cover their partners’ insurance premiums. However, these must be accounted for as Guaranteed Payments, since partners don’t receive a W-2 Wage. More information on partnerships

Sole Proprietors and Health Insurance Premiums

As a sole proprietor, you can deduct health insurance premiums directly on your Form 1040. Sole proprietor tax deductions explained

Small Business Health Care Tax Credit

Additionally, small employers may qualify for a tax credit through the small business health care tax credit. To be eligible, employers must:

• Have fewer than 25 full-time equivalent employees

• Pay average wages of less than $50,000 per full-time equivalent (adjusted annually for inflation starting 2014)

• Provide a qualified health plan through a Small Business Health Options Program Marketplace (or qualify for an exception)

• Cover at least 50% of the cost of employee-only healthcare coverage.

Detailed information on the small business health care tax credit

Medical Reimbursement Plans For Small Businesses

Various medical reimbursement plans can further enhance tax savings for small businesses. Each has specific rules, which must be followed to qualify:

  1. IRC Section 125: Cafeteria Plans – This pre-tax deduction is an excellent way to deduct employee-paid group health insurance from a paycheck. It can also be applied to Group Term Life plans, Flexible Spending Accounts (FSAs), and elective defined contribution plans.
  2. IRC Section 105 Plan (HRA) – Suitable for a Schedule C or SMLLC, and can be implemented via a Family Management Company. This plan is ideal if your business employs at least one person (potentially a spouse), you are over 25, and reasonable compensation is paid.
  3. HSA: Health Savings Accounts – This medical savings account is perfect for taxpayers with a high deductible. The account grows tax-deferred, akin to an IRA. Contributions are tax-deductible and qualified distributions are tax-free. Unlike FSAs, HSAs don’t expire annually and unused contributions can be rolled over, making it a potential retirement fund.
  4. QSEHRA: Qualified Small Employer Health Reimbursement Account – If your company doesn’t offer health insurance, this company-funded account allows for medical expense reimbursement, considered part of an employee’s compensation package. Reimbursements are flexible with a maximum contribution amount, and the benefit is shown on Form W-2 in box 12 code FF.
  5. IRC Section 401(h): This retirement plan comes with a medical benefit. Attached to a Cash Balance Plan offered by the employer, it’s funded with pre-tax dollars, grows tax-deferred, and allows for tax-free qualified withdrawals.
Connect With Us For Personalized Assistance

Maximizing your business tax benefits involves a deep understanding of these complex regulations. To ensure you’re optimizing your health insurance premiums and making the most out of your business structure, connect with our team of experienced tax professionals.

We’re here to provide personalized advice tailored to your business’s unique needs. Don’t navigate the maze of tax regulations alone – let us guide you to make informed, financially beneficial decisions. Contact us today to discuss how we can assist in optimizing your business tax strategies.


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