March is here, and tax season is in full swing. If you’re a business owner or employee, you may be wondering: Does employer health insurance affect taxes? Understanding how health insurance premiums, deductions, and tax credits work can help you maximize savings and avoid costly mistakes.
At Skyline Benefit, we will help you break down how employer health insurance affects your taxes, including pre-tax or after-tax premiums, how they impact deductions, and what to consider when filing your tax return.
How Employer Health Insurance Affects Your Taxes
Most employer-sponsored health insurance premiums are paid with pre-tax dollars, meaning they are deducted from your paycheck before taxes are calculated. This reduces your taxable income and lowers the amount of federal and state taxes you owe.
However, in some cases, employees may pay for their health insurance with after-tax dollars, which can impact tax deductions. Understanding the difference between pre-tax and after-tax contributions is important when considering potential tax savings.
Are Employer Health Insurance Premiums Tax Deductible?
Yes! Businesses can deduct the cost of providing health insurance to employees as a business expense, reducing taxable income. Here’s how it works based on your business type:
- Corporations: Can deduct 100% of premiums paid for employees and their dependents.
- S Corporations: Owners with 2% or more ownership must report employer-paid premiums as income but may still deduct them.
- Partnerships & LLCs: Partners can deduct their health insurance costs on personal tax returns if premiums are reported as guaranteed payments.
Is Employer Health Insurance Considered Taxable Income?
In most cases, the amount an employer contributes to an employee’s health insurance is not considered taxable income. This means:
- Employer contributions are not included in your gross income.
- Pre-tax employee contributions lower your taxable income.
- No payroll taxes are applied to employer-paid premiums.
However, certain employer benefits, such as stipends or specific types of Health Reimbursement Arrangements (HRAs), may be taxable depending on how they are structured.
Pre-Tax vs. After-Tax Health Insurance Premiums
Pre-Tax Premiums
- Deducted from your paycheck before income and payroll taxes.
- Reduce taxable income and lower the amount of taxes owed.
- It cannot be claimed as a tax deduction.
After-Tax Premiums
- Deducted from your paycheck after taxes have been calculated.
- Do not reduce taxable income.
- May be eligible for a tax deduction if total medical expenses exceed 7.5% of adjusted gross income (AGI).
Employees can confirm whether their premiums are pre- or after-tax by reviewing their pay stubs or consulting their employer’s HR department.
Can You Deduct Employer Health Insurance Premiums on Your Taxes?
Health insurance premiums cannot be deducted from taxable income if they are paid with pre-tax dollars. However, individuals who pay their premiums with after-tax dollars may qualify for certain tax deductions:
- Medical Expense Deduction – Available if total medical expenses exceed 7.5% of AGI.
- Self-Employed Health Insurance Deduction – If you are self-employed and purchase your insurance, you may be able to deduct the full cost of premiums.
- Health Savings Account (HSA) and Flexible Spending Account (FSA) Contributions – Contributions to these accounts may be tax-deductible.
Does Employer Health Insurance Affect Eligibility for Tax Credits?
Individuals with access to affordable employer-sponsored health insurance are generally not eligible for Premium Tax Credits through Covered California.
However, employees may qualify for tax credits when purchasing a plan through the Marketplace if an employer-sponsored plan is considered unaffordable—meaning it costs more than 9.02% of household income in 2025.
What Happens to Health Insurance If You Change Jobs?
When switching jobs, employees have several health insurance options:
- COBRA Coverage – COBRA Coverage allows individuals to continue their current employer-sponsored plan for a limited time, though they must pay the full premium.
- New Employer Health Plan – Employees can enroll during the new hire period if the new employer offers health insurance.
- Marketplace Insurance – Employees losing employer coverage may qualify for a Special Enrollment Period to purchase a plan through Covered California, potentially with tax credits.
How to Report Employer Health Insurance on Taxes
Most employees do not need to report employer-sponsored health insurance on their tax returns. However, employers typically provide:
- Form 1095-C – For employees of large companies offering health insurance.
- Form 1095-B – For employees of smaller companies that provide coverage.
Employees should keep these forms for their records but are not usually required to submit them when filing taxes.
Does Employer-Sponsored Health Insurance Affect a Spouse’s Taxes?
If an employer offers family coverage, a spouse’s premiums may be deducted pre-tax, reducing taxable income. Depending on their income and access to other coverage, a spouse who chooses not to enroll in employer-sponsored coverage may be eligible for ACA tax credits.
Need Help with Group Health Insurance Enrollment in 2025?
Skyline Benefit is an independent health insurance broker in Fullerton, CA that offers affordable and flexible group health insurance options. Selecting the best group health insurance plans can be overwhelming; our mission is to simplify the process and help our clients every step of the way.
Schedule a consultation today. Call us at: (714) 888-5112