Is Health Insurance Tax Deductible for Small Businesses?
Health insurance is typically tax deductible for small businesses. Still, there are a few things to keep in mind regarding group size, plan types, and other potential deductions.
Business Health Insurance Write Off
Sole Proprietors
If you’re running a super-small business, like a sole proprietorship or a single-member LLC, it’s actually pretty simple. Sole proprietors can deduct premiums through a personal income adjustment — it’s not an itemized deduction. Keep in mind it’s always a good idea to check with an accounting or tax professional to make sure everything is handled correctly.
Businesses Offering Employee Insurance
The good news? The premiums you pay for your employees’ health insurance (including their spouses and kids if you cover dependents) are fully deductible as a regular business expense. That means you can knock those costs off your federal and state income taxes.
If you’re a partner in a business partnership, part of an LLC, or own 2% or more of an S corporation, things can get a bit tricky. You’ll want to consult a tax advisor to determine if you can deduct health insurance on your federal and state taxes.
For employees, contributions made toward the cost of their health coverage are not directly deductible on their personal tax returns. However, those amounts can be deducted from their income on a pre-tax basis if you offer a Section 125/Premium Only Plan (POP). That increases their take-home pay and reduces taxable income.
Employees Enrolled in HDHPs and HSAs
If your employees are enrolled in a High Deductible Health Plan (HDHP), they may be eligible for a Health Savings Account (HSA). If your business makes contributions to your employees’ Health Savings Accounts (HSAs), those contributions are typically tax deductible for your business, too. Contributions are limited to amounts set annually by the Internal Revenue Service.
For 2024, HSA contributions were limited to $4,150 for self-only health insurance coverage. The family coverage contribution limit was $8,300. For those age 55 and older, an additional $1,000 was permitted as a catch-up contribution. Contribution limits for 2025 are slightly higher: $4,300 for self-only coverage and $8,500 for family coverage. The $1,000 catch-up contribution remains the same for those eligible.
Pairing an HDHP with a POP can save you between 25% and 40% on payroll deductions.
Additional Business Deductions
Even if you’re a small business that can’t sponsor a group health plan, there might still be some tax benefits available to you. For example, under federal law, some qualifying businesses may fund special health care reimbursement accounts. Employees can use these to help pay for private health insurance plans for themselves or their families.
If you have fewer than 50 employees, you can offer a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). It’s a great way for small businesses to reimburse certain health care expenses, like insurance premiums and coinsurance, without it being taxed.. More information is available on QSEHRAs on the HealthCare.gov website.
Offering health insurance doesn’t just come with tax benefits — it can also save you money on payroll taxes. Plus, it’s a great way to attract and keep your best employees.
Changing Tax Rules
The reality is federal and state tax laws are complex, and change frequently. That’s why working with a tax professional to get advice tailored to your business is critical. Every employer’s tax situation is unique, so it’s important to understand the federal and state rules that apply to you.
Contact Your Broker for More Information
Your health insurance broker can provide you with more information on the deductibility of employee health insurance and other benefits. They can help you compare health plans — and find coverage that meets your employees’ needs while controlling costs for your business. If you don’t already have a broker, it’s easy to connect with one online.