Writing off business expenses saves businesses millions of dollars in taxes each year. But what about health insurance? Are premiums considered business expenses?
Saving money on taxes by properly itemizing business expenses can save a business substantial money year after year. One of the biggest expenses that business owners might look to write off is health insurance. In this article, you’ll learn when health insurance premiums can and can’t be written off as business expenses. But even when it isn’t a business expense, health insurance premiums are usually still tax-deductible. So it’s important to know the difference.
If a company is subsidizing the health insurance premiums for its employees, those amounts paid can be considered a business expense. For people who are self-employed, members of a partnership, or owners of an S Corporation (or other small business), health insurance is not considered a business expense. But they are tax-deductible!
When it comes to businesses, self-employment, and taxes, there is an abundance of information out there. We just compiled it into one easy-to-read place to make it as simple as possible for everyone to learn. Everything you find here is information based on our own hands-on experience as well as requirements pulled directly from the IRS.
Health Insurance: Business Expense or Tax Deduction?
Business expenses are ways for companies, corporations, and organizations to reduce their tax bill at the end of the year by lowering the amount of taxable income they truly had. One of the most common expenses that businesses have is health insurance. But health insurance isn’t always considered a business expense.
No matter if you’re a business owner or you’re self-employed, it’s important to understand how health insurance is handled when it’s tax time to make sure you’re not overpaying. So let’s take a look at whether or not health insurance is a business expense in a few different scenarios.
Deducting Group Insurance as a Company
The most common type of health insurance in the entire healthcare industry is group insurance offered through a company or an employer. Businesses and organizations are able to get a good price from the insurance companies and pass it on to their employees due to the large number of people that join the plan, hence the term group insurance. This is the type of insurance that you’ll have access to in most lines of work (unless you’re self-employed, for example), that is offered through your employer.
In most cases, your employer will even cover a portion of the health insurance premium for you, known as the employer subsidy. While this is a huge benefit to you as the employee since you get to save money on your health insurance, it also helps your employer out as well. This portion of the premium that your employer covers is what they hope to claim as a business expense.
And when it comes to a company that offers group insurance, they are able to write off the amount that they cover as a business expense every year come tax time. This is one of the rare insurance transactions where everyone wins. The insurance companies get more people signed up on their plan. The employees get cheaper insurance due to the employer subsidy. And the employer gets to write off the premiums as a business expense and lower their tax bill.
Is Self Employed Health Insurance a Business Expense?
But what about if you’re self-employed? Can you still write off your health insurance premium as a business expense? This is where it might get a little bit confusing, but bear with us and it’s actually pretty easy to understand. The short answer to this is no, self-employed people cannot write off health insurance costs as a business expense. But there’s much more to it than that.
The good thing is that even if you can’t write off health insurance costs as a business expense, it is still considered tax-deductible in most cases. As a self-employed person (either as a sole proprietor or single-member LLC), you’re able to write off healthcare premiums including those for normal health insurance, dental and vision insurance, and even long-term care insurance for yourself, a spouse, and dependents. But only if you qualify.
The “only if you qualify” caveat refers to a couple of things. First, you can’t write off health insurance costs if you’re eligible to receive insurance from an employer-subsidized plan or through spousal coverage (joining your spouse’s plan). Secondly, you must have made money during the year in question and show a net profit on the Profit and Loss From Business Form (Schedule C).
But if you are self-employed and the above caveats do not apply to you, then you should be able to write off those costs. Remember, these costs are not classified as business expenses and therefore would not go on the Schedule C. As a self-employed person, the deduction goes on the Form 1040 as a personal tax deduction rather than an actual business expense.
Can Partnerships Claim Health Insurance as Business Expense?
If you’re part of a legal partnership it can get even a little bit more difficult to understand than if you’re self-employed by yourself, but we’ll walk you through it here. Similar to the aforementioned people who are self-employed, members of a partnership also can’t technically write off health insurance as a typical business expense. But just like before, don’t let that deter you.
Partners are still able to use their insurance costs as a tax deduction off of their income come tax time. Partners are able to deduct medical insurance, dental and health insurance, and long-term care insurance either as individuals or through the partnership itself. But the way that it’s reported and deducted is a bit different than what we’ve seen.
In a partnership, profits and losses are passed through the partners’ individual tax returns because partnerships are not legally considered a business. This allows partnerships to avoid paying business income taxes, just personal income taxes. Due to this, the tax deduction for health insurance is reported as a personal tax deduction rather than a business expense. During tax time, these personal deductions go on a Form 1065, Schedule K-1 where it details the Partner’s Share of Income, Deductions and Credits.
What About S Corporations and Other Small Businesses?
Small business owners and S Corporations were also not forgotten when it comes to healthcare costs, but these costs again can’t technically be written off as a business expense. They can, however, still be deducted on the owner/shareholders’ personal income tax. S Corporations were specifically designed for small businesses in the hope of providing them with tax breaks that larger businesses are not granted. That said, S Corporations do not have to pay business income tax.
And just like before with the partnership, since these corporations don’t pay business income taxes, the health insurance premiums cannot be written off as a business expense. Just like before, profits and losses of an S Corporation and other small businesses alike are passed through individual tax returns. So with these types of businesses, the tax deduction is applied to personal tax returns rather than the business’s filing.
What’s interesting about health insurance through an S Corporation is that these premiums can be paid by either the owner (shareholder) or the corporation itself. So that might make you think if they’re paid by the corporation, isn’t that a business expense? Not exactly.
With an S Corporation that pays the premiums, the policy must be in the corporation’s name. But the premiums are still reported on a W-2 statement of the owner or shareholder. This means that the premiums would still not be considered a business expense, just a tax deduction.
So as you can see from all of this, health insurance is usually only classified as a business expense if it’s a company or business paying group insurance for their employees. But if you’re self-employed, a member of a partnership, or a shareholder in an S Corporation, healthcare costs are tax deductible. But they aren’t business expenses. It can certainly get confusing!
Is a Health Savings Account Considered a Business Expense?
If you’re in the market for health insurance or you already have a high-deductible health plan (HDHP), you might’ve seen the term Health Savings Account (HSA) floating around. HSAs are just an account that you can put money in and then use the funds exclusively for healthcare expenses. Since these accounts are a type of savings account/investment avenue for an individual, they are not considered business expenses in the normal sense of the word.
But due to how they’re designed and the various tax benefits that they offer, HSAs can provide you even more deductions come tax time than the typical health insurance premiums above. HSAs are triple tax-advantaged and allow you to write off your contributions (limited to $3,600 per year), the earnings in the account grow tax-free, and withdrawals for healthcare expenses are also untaxed.
So the short answer is no, health savings accounts are not business expenses that can be written off. But due to all of the tax benefits that they offer, they are a great opportunity for those that have access to them, including business owners and self-employed people.
