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 Tax Savings Benefits Calculator for Employees

Small-Sized and Medium-Sized Business Employers

Small business employers

Tax Benefits of Health Insurance and Other Health Benefit Options

Group Health Tax Benefits

  • Tax advantages help make the cost of purchasing group health insurance much more manageable and affordable.
  • The general rule is that any expenses an employer incurs related to health insurance are 100% tax deductible as ordinary business expenses. Employers are taxed on the difference between revenue and expenses. Since the cost of health premiums is an expense, the profit is less, thus saving federal income taxes in a single year. When FICA (Federal Insurance Contributions Act) taxes (Social Security and Medicare) and state taxes are included, additional savings are made. See the example below:

The owner of an eight-person firm (with seven dependents) offers health insurance, and everyone participates. The total premium annually is $48,000. The employer has agreed to pay 70% of the premium, which would be $33,600 per year. However, tax benefits greatly reduce this cost by about 40% (this assumes the business is in the 27% tax bracket).

Employer's cost of health insurance premium without tax savings $33,600
Savings in income tax per year because the premium is tax deductible $33,600 x 0.27 = $9,072
Savings in FICA and state taxes (assumes state taxes are 5%) $4,250
Total tax savings $9,072 + $4,250 = $13,322
Cost of health premiums with tax savings $20,278, or 40% of the employer's cost of the health insurance premium

Tax Savings from Other Health Benefit Options

  • Health savings accounts (HSAs) and health reimbursement arrangements (HRAs) are alternatives to traditional health insurance coverage that employers can offer employees. HSAs and HRAs allow employers and/or employees to set aside pre-tax income to cover medical expenses. These health benefit options are most often combined with a higher deductible premium health insurance policy.
  • As long as funds are spent on qualified medical expenses,* businesses may take federal and state income deductions and payroll tax savings (FICA) for employer contributions to HSAs and HRAs and their accompanying higher deductible health plans. Employees also receive tax savings.
  • Flexible spending accounts (FSAs) are similar to HSAs and HRAs except they are generally used to supplement traditional health insurance benefits, not as an alternative. FSAs also allow employers and/or employees to set aside pre-tax income to cover qualified medical expenses.* There are federal and state income tax savings and payroll tax savings (FICA) for employers and employees.

*Qualified medical expenses are defined in section 213 (d) of the Internal Revenue Code. They include blood tests, hospital bills, x-rays, vaccines and hearing aids.

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