if you ongoing salary For your small business, there’s a good chance you’re also taking pre-tax health insurance deductions. This can be a tricky topic, especially if this is the first time dealing with health insurance for your team. But by understanding how health insurance and taxes intersect and how to best support your hourly employees, you can set yourself up for success.
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Employee health insurance pre-tax?
Most employer-sponsored health insurance premiums are pre-tax for both employees and employers. For example, if you offer a Section 125 For qualified plans (such as a cafeteria plan), your premiums will be pre-tax. This means neither employer contributions nor employee deductions will be subject to payroll tax, which can mean big tax savings for both your business and your employees.
However, no all Employee health insurance plans are pre-tax, so always be sure to double check with your provider.
Pre-tax contribution to health insurance
When running payroll, you make any necessary benefit contributions and deductions before calculating and withholding tax. Then, you can use that money to make timely premium payments for your plan.
It’s also a good idea to check that you’re correctly indicating your benefit contributions on pay stubs, so employees have a record of how much they’re paying for insurance.
Are other health-related benefits pre-tax?
There are other health-related benefits you can offer your employees that qualify as pre-tax deductible. Some examples include:
- Health Savings Accounts (HSAs)
- Flexible Spending Accounts (FSAs)
- Supplemental health insurance coverage
If you are interested in offering one of these plans, talk to your insurance broker.
S-corp owners and after-tax health insurance contributions
Generally, employer-sponsored health insurance has a pre-tax premium, but there is one notable exception, which is health insurance for employers. S-Corporation.
If you’re more than a 2% shareholder in an S-Corp and your company pays for any health and accident insurance premiums, those premiums are subject to taxes like regular wages. So ensure that no pre-tax deductions or contributions are made through payroll and include the cost of that premium in your taxable wage base.
8 more small business tax and health care questions
1. Does my small business need health insurance?
Small businesses with fewer than 50 employees are not required to offer health insurance under this Affordable Care Act (ACA). But it’s still a good best practice to cover your employees: they’ll benefit from lower taxable income and healthcare costs, and you’ll attract and retain more employees, as well as get yourself a tax break.
It’s also worth noting that you may qualify for group health insurance if your business has one to 50 employees. You must have at least one employee besides yourself who works full-time and is not a family member.
2. What is the average cost of health insurance for a small business?
According to a report by the Kaiser Family Foundation (KFF), the average small business pays the following:
- $7,813 For individual plans ($6,485 by employer, $1,328 by employee)
- $21,804 for family plans ($13,737 by employer, $8,067 by employee)
The percentage of pay employers pay depends on what employees choose to include in their plans and what type of coverage they need.
3. How do I get health insurance for my small business?
Starting the process of finding small business health insurance can be difficult. If you don’t know where to start, here are some steps you can follow:
- Gather all the information you need, such as business and employee details and budgets
- Learn about the different types of health insurance and decide which one best suits your needs
- Find a broker to help you navigate the insurance market
- Consider joining a trade or professional association to share costs
- Compare and evaluate all options from your research
- Choose an insurance plan, sign the paperwork and inform your employees
4. What type of health insurance plan should I choose?
As with most other health insurance-related questions, the answer is “it depends.” Fortunately, as a small business owner, you have a small number of employees to consider. You probably know them well and can tailor your health insurance plan to their specific needs.
Young employees with no dependents, good overall health and low savings may prefer a plan with smaller premiums. For example, shops or restaurants that have a lot of student workers. The disadvantages of this route are higher payroll costs and unpredictability with your employees’ medical expenses for the year.
Then, there is the opposite situation. Higher premiums mean lower deductibles and more affordable hospital and medical bills. It is a more attractive option for employees with families and those above 55 years of age In this population, minor health problems are more likely to occur and medical bills can accumulate more quickly
5. What percentage of health insurance do employers pay?
The ACA does not require employers to pay a certain percentage of their employees’ premiums. That said, many states require employers to pay at least 50%So check your state laws to be sure.
But employers still pay more than half of health insurance premiums. According to KFF, employers pay approx 83% For average unit coverage. Remember, in many cases, you are competing with other businesses for the same pool of employees. You can keep yourself competitive by offering attractive health insurance coverage.
Also, small businesses tend to have low profit margins and cannot afford to hire underperforming employees. You need top talent so you don’t lose money through low productivity and high turnover.
6. How do I calculate the pre-tax health insurance deduction?
Use a simple formula to calculate what to deduct from your employee’s earnings for pre-tax health insurance:
Let’s say your employee earns $2,000 a month, their monthly premium is $500, and they pay 25% of the cost:
- 25 divided by 100 is 0.25
- 500 multiplied by 0.25 is 125
- $2,000 minus 125 is $1,875, your total
Don’t forget, you must take out the health insurance before blocking. And then, you calculate the 7.65 FICA rate based on adjusted gross income. In the above example it is $1,875, no $2,000
Be sure to explain to employees that they cannot claim those premiums back on their tax returns as they have already received tax benefits.
7. How do I determine employee eligibility for each health insurance plan?
Generally speaking, employers may offer different health insurance plans to different employees. For example, you may decide to offer health insurance only to full-time employees or more health benefits to more senior employees.
But you must base your decision on employment-related criteria such as hours, location and experience. If you treat employees differently for any other reason, you face a discrimination lawsuit.
Legally, you are not even allowed to treat people of the same category differently. For example, you cannot single out a full-time employee and give them special treatment.
If you have self-employed people working for you — for example, in a salon or tattoo studio — they will be responsible for their own medical insurance.
8. What healthcare plans include dental and vision?
Health insurance plans may include dental and vision, but usually don’t. Employers often have to add them separately. But remember that enrollment for this type of insurance is ongoing, not just at the end of the year.
Consider looking for a health care plan that includes dental or vision or gives you the option to add them later. Your employee’s dental and visual health is extremely important, especially since most modern businesses involve looking at screens. Routine appointments mean identifying problems early and ensuring staff can carry on with their jobs effectively.
Get answers to all your SMB healthcare and tax questions with Homebase
Hopefully, you now have a better understanding of pre-tax deductions and health insurance. But maybe you are still feeling the pressure of choosing the right insurance provider. There’s a lot to overcome and a lot more that can go wrong — like accidentally leaving workers uninsured or getting a nasty penalty from the IRS.
Take a breath, because we think we’ve got the answer. of homebase Salary Features Lets small business owners and managers like you automatically calculate their payments, including health insurance. Then, you can rest assured that your employees’ health care expenses are error-free and taken care of.
With Homebase, you get full support, including all your taxes and healthcare, so you can set it up and watch our software work for you. And if you experience any growing pains, our support team has your back.
Onboard employees, track their time and pay them — all in one place.