Offering health benefits to employees is often one of the best decisions a small business owner can make. It not only helps attract and retain top talent, but also improves morale and productivity across the organization. Yet many small businesses hesitate because of the perceived complexity and cost.
One of the most overlooked advantages of providing health insurance is the potential for tax savings. Understanding how health benefits affect your business’s taxes is essential for making informed decisions. There are deductions, credits, and reporting requirements that can work in your favor if you plan carefully.
This blog will break down the key tax implications so you can confidently explore how offering health benefits fits into your overall strategy.
The Good News: Health Benefits Can Save You Money at Tax Time
One of the biggest advantages of offering health insurance to your team is the potential tax savings.
1. Employer-Paid Premiums Are Tax Deductible
When your business pays for employee health insurance premiums, those payments are considered an ordinary and necessary business expense. This means they’re fully tax-deductible at the federal level. The deduction reduces your company’s taxable income, potentially lowering your overall tax bill.
2. Employee Premium Contributions Are Tax-Free
Employees who receive employer-paid health insurance do not have to pay income tax on the value of those benefits. These contributions are also typically excluded from Social Security and Medicare tax calculations. This tax-free status is one of the reasons health benefits are so highly valued by employees.
Small Business Health Care Tax Credit
If you run a small company with a modest payroll, you may also qualify for the Small Business Health Care Tax Credit. This credit can directly reduce the taxes you owe, making offering benefits even more affordable.
Are You Eligible?
You may qualify if:
- You have fewer than 25 full-time equivalent (FTE) employees.
- Your employees have average annual wages below $62,000 (2025 threshold; this adjusts annually).
- You pay at least 50% of employees’ premium costs.
- You purchase coverage through the SHOP (Small Business Health Options Program) Marketplace.
How Much Is the Credit?
- For-profit companies can receive a credit of up to 50% of premiums paid.
- Nonprofits can receive up to 35%.
- The credit is available for two consecutive tax years.
How to Claim It
You’ll need to file IRS Form 8941 and keep clear records of your employee count, wages, and premium contributions. The paperwork may seem intimidating, but working with a payroll or HR provider like The HR Ally makes it simple.
Get the Most from Your Health Benefits and Tax Strategy
Health Reimbursement Arrangements (HRAs)
If a traditional group health plan isn’t right for your company, you still have tax-friendly options through Health Reimbursement Arrangements (HRAs).
Qualified Small Employer HRA (QSEHRA)
Designed specifically for companies with fewer than 50 full-time employees, a QSEHRA allows you to reimburse employees tax-free for qualifying medical expenses and premiums.
A few things to know:
- There are annual contribution limits set by the IRS.
- Employees must have minimum essential health coverage to participate.
- All reimbursements are tax-free for both the company and employee.
Individual Coverage HRA (ICHRA)
The ICHRA is another flexible tool for businesses of any size. It allows you to reimburse employees for their individual health insurance policies. Employees must be enrolled in individual coverage to qualify.
With an ICHRA, you can:
- Offer different reimbursement amounts to different employee classes (as defined by the IRS).
- Avoid offering a traditional group plan while still giving employees help with healthcare
Compliance and Reporting: Don’t Skip This Step
Offering health benefits is fantastic for your company, but reporting requirements must be handled carefully:
- The Affordable Care Act (ACA) requires applicable large employers (ALEs, typically 50+ employees) to offer affordable coverage or face potential penalties.
- Even smaller companies must report the value of health benefits on employees’ W-2 forms.
- Accurate documentation of your health plan, premium contributions, and employee communications is critical to avoid costly IRS penalties.
This is where having a knowledgeable HR partner like The HR Ally can give you peace of mind.
Making Employee Benefits Work for Your Business
The decision to offer employee health benefits can feel complex, but the long-term rewards for both the business and the team are substantial. Health coverage is more than a compliance issue or tax strategy; it is a reflection of a company’s commitment to building a stable and motivated workforce.
The HR Ally works with small businesses in Houston to take the guesswork out of payroll and HR compliance. From helping navigate reporting requirements to ensuring accurate payroll adjustments when benefits are offered, The HR Ally provides the guidance small business owners need to move forward with confidence.
To learn more about simplifying HR and payroll processes, reach out to The HR Ally.