The beauty of having health insurance available through your employer is that you typically pay the premiums with pretax dollars. This means that the money isn’t taxed as some other employee benefits are, making health insurance a very nice perk of employment. Of course, there are some minor drawbacks, too, and there are exceptions to every rule.
Health insurance premiums and other employee benefits are typically paid for using pretax income. That being said, you may be surprised about what options are available to you when it comes to withholdings and deductions. You may be able to deduct your health insurance premium on IRS Form 1040.
Claiming Your Withholdings
If you earn $700 a week in gross wages and your employer paid health insurance premiums are $50 a week, your employer most likely deducts that $50, then calculates your tax withholding on the remaining $650. Tax withholding is a percentage of your pay, so a percentage of $650 is obviously less – and therefore better – than a percentage of $700. You end up paying for your health insurance, something you’d have to do anyway, and getting a tax break, too. Your employer also gets a break; he doesn’t have to match your Social Security and Medicare taxes on that $50 as he would have to if you’d been taxed on the money.
The same rule applies to any Health Savings Account contributions you make. Tax law is set up to provide for this tax-free status if your employer establishes what’s called a cafeteria plan. The downside here is that you can’t also claim employee deductions for the premiums if you elect to itemize on your tax return. That would be like getting two tax breaks for the same money.
Deductions Paid With After-Tax Dollars
Tax-advantaged healthcare policies through your employer usually have dedicated enrollment periods during which you can sign up for or change your existing coverage. If you miss this period, it’s possible – though not really likely – that you might be paying your premiums with after-tax dollars. But this typically only happens when you go out and purchase your own policy and arrange for the premiums to be automatically debited from your pay. The good news is that you can claim a tax deduction for premiums you pay with after-tax money, subject to some limitations, if you itemize on your return.
So, how do you know whether you’re paying the employee benefits premiums with pretax or after-tax dollars? Simply ask your employer or take a look at your W-2 form. If you’re paying the premiums with after-tax dollars, that money will be included in box 1 of your W-2, “Gross Wages.” Otherwise, if you’re paying with pretax dollars, it should not appear on your W-2. Compare box 1 with your pay records.
Another exception to the usual rule is when your employer actually pays for your health benefits. The premiums would not show up in box 1 of your W-2 in this case, either. The money that goes toward your coverage, even if it’s for your whole family, is not considered to be wages and is not subject to taxation because you’re getting your health benefits for free.
An exception exists if you work for an S corporation and you own more than 2 percent of the company. If you’re receiving employer paid health insurance coverage at no cost to you, this also eliminates the possibility that you could claim a tax deduction for the premiums if you itemized.
Filing Your Employee Deductions
You may be able to deduct your health insurance premium costs on IRS Form 1040 if your overall costs exceed 10 percent of your adjusted gross income (AGI). Typically, this deduction is only beneficial in the event that an individual sustains heavy medical expenses throughout the year. If you have decided to take this deduction, remember that eligibility is calculated based upon your AGI. This means that you can only determine your qualification for this deduction after all of your other deductions have been taken into account.
- TurboTax: Can I Deduct Health Insurance Premiums Taken From My Paycheck?
- Bankrate: Payroll Taxes on Health Insurance?
- IRS: Employee Benefits
- Zane Benefits: Pre-Tax vs. After-Tax Medical Premiums
- H&R Block: Adjustments and Deductions
- IHC Specialty Benefits: Are Health Insurance Premiums Tax Deductible?
- IRS. "Topic No. 502 Medical and Dental Expenses." Accessed Oct. 17, 2020.
- IRS. "Publication 502 Cat. No. 15002Q: Medical and Dental Expenses (Including the Health Coverage Tax Credit): For Use in Preparing 2017 Returns." Pages 2-3. Accessed Oct. 17, 2020.
- Congressional Research Service. "Individual Tax Provisions (“Tax Extenders”) Expiring in 2020: In Brief." Page 8. Accessed Oct. 16, 2020.
- IRS. "Definition of Adjusted Gross Income." Accessed Oct. 17, 2020.
- IRS. "Employee Benefits." Accessed Oct. 17, 2020.
- Tax Policy Center. "How Does the Tax Exclusion for Employer-Sponsored Health Insurance Work?" Accessed Oct. 17, 2020.
- IRS. "Publication 535 Cat. No. 15065Z: Business Expenses: For Use in Preparing 2019 Returns." Page 23. Accessed Oct. 17, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.