Is Health Insurance a Business Expense?

Health insurance is a cost for any business, and understanding its tax implications is important for managing expenses. Premiums a business pays for health coverage can be claimed as a tax-deductible expense, lowering the company’s taxable income. The specific rules for these deductions vary based on who is being covered and the business structure.

Deducting Premiums for Employees

When a business provides health insurance to its employees, the premiums it pays are generally considered a deductible business expense. The Internal Revenue Service (IRS) views these costs as a form of employee compensation, similar to salaries and wages, qualifying them as an ordinary and necessary business expense. This deduction is claimed on the business’s tax return, directly reducing its taxable income.

For example, a sole proprietor would deduct these expenses on their Schedule C, while a corporation would list them on Form 1120. The deduction covers 100% of the premiums paid by the employer for medical, dental, and vision insurance for employees and their qualifying dependents. The benefit is also typically received by the employee tax-free.

Deduction Rules for Business Owners by Entity Type

The ability of a business owner to deduct their own health insurance premiums is directly tied to the legal structure of the business. The path to deduction for an owner varies between C-Corporations, S-Corporations, partnerships, and sole proprietorships.

C-Corporation

For owner-employees of a C-Corporation, the rules are favorable. A C-Corporation is a distinct legal entity separate from its owners, which allows it to provide health insurance as a tax-free fringe benefit. The corporation can pay the health insurance premiums for its owner-employees and deduct 100% of the cost as a business expense on its corporate tax return, Form 1120.

This arrangement is advantageous because the value of the health insurance benefit is not considered taxable income to the owner-employee. To qualify, the insurance plan must be established by the corporation.

S-Corporation

The rules for S-Corporation owners who own more than 2% of the company require a specific reporting process. The S-Corporation can pay the health insurance premiums, but it must include the cost on the shareholder-employee’s Form W-2 as part of their gross wages. While this increases the shareholder’s reported income, these premium amounts are not subject to Social Security or Medicare (FICA) taxes.

This accounting treatment enables the shareholder to claim the self-employed health insurance deduction on their personal tax return, Form 1040. If the corporation fails to include the premiums in the W-2 wages, the deduction can be lost at both the corporate and personal levels.

Partnership

In a partnership, health insurance premiums paid by the business on behalf of its partners are treated as guaranteed payments. These payments are a form of compensation for services rendered. The partnership deducts the full cost of these premiums as a business expense on its tax return, Form 1065.

The premium amount is then reported to the partner on their Schedule K-1. The partner must include the guaranteed payment amount in their gross income, which allows them to qualify for the self-employed health insurance deduction. For this treatment to apply, the policy can be in the name of either the partnership or the partner. If the partner pays personally, the partnership must reimburse them and report the amount as a guaranteed payment.

Sole Proprietorship

For a sole proprietor, handling health insurance premiums is a personal matter, not a business one. A sole proprietorship is not a separate legal entity from its owner, so the business cannot deduct the owner’s premiums as a business expense on Schedule C. Attempting to list these premiums alongside other business expenses like supplies or utilities is incorrect.

Instead, the sole proprietor pays for the premiums personally and may be able to take the self-employed health insurance deduction. This is an “above-the-line” deduction on Schedule 1 of Form 1040, which reduces the owner’s adjusted gross income (AGI). The policy can be in the name of the individual or the business.

The Self-Employed Health Insurance Deduction

The self-employed health insurance deduction is available to sole proprietors, partners, and S-corporation shareholders who own more than 2% of the company. This deduction allows eligible taxpayers to subtract 100% of the cost of their health, dental, and qualified long-term care insurance premiums. It is claimed on Schedule 1 of Form 1040, reducing adjusted gross income (AGI), and can be taken even if the taxpayer does not itemize.

Two primary limitations apply. The first is a net profit limitation, meaning the deduction cannot exceed the earned income from the business under which the plan is established. For example, if a business has a net profit of $5,000 and premiums were $8,000, the deduction is limited to $5,000.

The second limitation relates to other health coverage. An individual cannot take the deduction for any month they were eligible to participate in a subsidized health plan offered by another employer, including a spouse’s employer. Eligibility is determined monthly, and the calculation is made on Form 7206.

The Small Business Health Care Tax Credit

Some small businesses may be eligible for the Small Business Health Care Tax Credit, which provides a dollar-for-dollar reduction of a business’s tax liability. This credit is designed to help small employers afford health insurance for their employees. To qualify, a business must meet several criteria:

• It must have fewer than 25 full-time equivalent (FTE) employees.
• Average annual employee wages must be below an amount adjusted annually for inflation.
• The employer must pay at least 50% of the premium cost for employee-only coverage.
• The business must purchase a qualified health plan through the Small Business Health Options Program (SHOP) marketplace.

The maximum credit is 50% of the premiums paid (35% for tax-exempt organizations) and is on a sliding scale based on business size and average wages. Businesses claim the credit by filing Form 8941, Credit for Small Employer Health Insurance Premiums.

Using Health Reimbursement Arrangements

Businesses can use Health Reimbursement Arrangements (HRAs) as an alternative to traditional group health insurance. With an HRA, the business reimburses employees tax-free for their qualified medical expenses, including premiums for individual health insurance. These reimbursements are a deductible business expense for the employer.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

A QSEHRA is available to employers with fewer than 50 full-time equivalent employees that do not offer a group health plan. The employer sets a monthly allowance for each employee for health care costs, up to an annual IRS limit. For 2025, these limits are $6,350 for an individual and $12,800 for a family.

Individual Coverage Health Reimbursement Arrangement (ICHRA)

An ICHRA is available to businesses of any size and offers more flexibility, as there are no caps on the reimbursement amounts an employer can offer. Employers can also offer different benefit levels to different classes of employees. With both a QSEHRA and an ICHRA, the reimbursements are not considered taxable income to the employee, provided the employee has qualifying health coverage.