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Employers may take a tax deduction for any premiums paid regardless of whether they pay the full or partial amount. This is an incentive by the government for businesses to provide ordinary and necessary contributions to their greatest resource, their employees. Due to this incentive, many employers will be more likely to offer paid health insurance for their employees as a way to lower their tax liability and retain staff.
Employees on group policies can exclude any premium amounts paid for by their employers from their taxes as well as any benefits received. For instance, if you make $40,000 annually and your employer pays $10,000 in premiums, you would only be taxed on your gross income of $40,000 while the $10,000 of premiums is exempt and your employer can deduct that amount as a business expense. The money paid for health insurance by employers is never seen as income and therefore is not taxable.
Although current benefits are not taxed, this could change as part of discussions about taxing these benefits to fund the overhaul of the health care system in the United States. By doing so, billions of dollars could be raised to help with reform and help many without insurance to obtain affordable health care. -
The amount of premiums paid on a group policy is taxable because it is paid with after-tax income. Although there are incentives for employers to pay for health insurance, individuals have no such incentive and must pay tax on premiums paid due to the fact that their income is taxed and their premiums are paid from that source. Many take jobs solely for the health insurance as the cost has increased dramatically and the amount of money saved can be substantial with an employer-paid policy.
Unlike group policies, medical expenses are ordinarily not tax deductible with individual health insurance unless the amount is more than 7.5 percent of your adjusted gross income for that year. In other words, you cannot lower your taxable income by deducting the amount spent on medical expenses unless it reaches a certain amount relative to your income. For someone who has an adjusted gross income of $50,000, amounts spent over $3,750 on medical expenses can be deducted to lower your tax liability.
