Are Health Insurance Premiums Deducted From My Paycheck Taxable?

by Beverly Bird ; Updated March 15, 2018

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 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.

Deductions Paid With Pretax Dollars

If you earn $700 a week in gross wages and your 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 a deduction 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.

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Check Your W-2 Form

So, how do you know whether you’re paying the 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.

Employer-Paid Benefits

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 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.

About the Author

Beverly Bird has been writing professionally since 1983. She is the author of several novels including the bestselling "Comes the Rain" and "With Every Breath." Bird also has extensive experience as a paralegal, primarily in the areas of divorce and family law, bankruptcy and estate law. She covers many legal topics in her articles.

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