Medical, dental and vision insurance paid for employees by the business are fully tax-deductible business expenses for Federal and California State income taxes.

Is health insurance tax deductible?

Business owners can also deduct the premiums they pay for medical, dental and vision insurance, but they take the deduction on their personal income tax return, not by making pre-tax salary deductions from their paychecks.  The specific steps are described below.

We assist many small businesses and startups with setting up their group employee benefit plans.  We have found that many small employers are confused about how to account for medical insurance paid for the owners by the company.  This article sheds some light on that topic.  Give us a call if you would like us to assist you with your employee benefits (800) 746-0045.

IMPORTANT: We do not give tax advice.  You should rely on the advice of a tax professional.

Key Points

  • The IRS requires “the insurance plan must be established… under your business.”
  • Members of an LLC and owners of an S Corp, deduct their group medical insurance on their personal income tax return.
  • Business owners should have a separate expense line item that shows insurance premium paid for each owner and a separate line item for insurance premium paid for employees.
  • The tax advantages for business owners of deducting the premium for medical insurance encourages owners to enroll in better medical insurance plans with lower deductibles, small co-pays and co-insurance, since the premium is tax-deductible and deductibles, co-pays and other payments for services are generally not tax-deductible.
  • Owners of Sub S Corporations and members of an LLC cannot participate in a Section 125 Premium Only Plan.
  1. Members of an LLC and owners of an S Corp, deduct their group medical insurance on their personal income tax return.  See this page from the IRS on S Corps. And Medical insurance Deduction. “A 2-percent shareholder-employee is eligible for an above-the-line deduction in arriving at Adjusted Gross Income (AGI) for amounts paid during the year for medical care premiums if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements.”
  2. During the year, the small business (LLC or Sub S Corporation) will pay the premium of the business owners and keep track of the amount paid for the owners. At the end of the year, the business owner’s Schedule K-1 will report the insurance paid by the business, or the amount will appear on the owner’s W-2.  The business owner will deduct that amount on their personal tax return (see form 7206 Self-Employed Health Insurance Deduction).   A business owner inputs insurance payments on Schedule 1, Part II, Line 17 on their personal tax return.
  3. The IRS deduction of a business owner’s medical, dental and vision insurance on Schedule 1 reduces the taxable adjusted gross income (AGI). The lower AGI lowers the taxes paid. On the other hand, money paid for “unreimbursed medical expenses” such as deductibles, co-payments and co-insurance, are not tax deductible until they total more than 7.5% of a taxpayer’s AGI.
  4. The favorable tax treatment for premiums gives business owners an incentive to have a better medical insurance plan (e.g., Platinum level with low or no deductible and low copayments and co-insurance).
  5. Section 125 of the Tax Code enables employees to make their contributions towards medical, dental and vision insurance on a pre-tax basis with each paycheck.  It specifically prohibits members of a small business (LLC and owners of 2% or more of a Sub S Corporation) from participating in the plan.  So, only your non-owner employees can deduct insurance premiums from their paychecks. Owners deduct their medical, dental and vision insurance premiums on their personal tax returns, as described above.

Please follow the guidance of your accountant for tax questions. Give us a call to assist with your group employee benefits (800) 746-0045.