Health insurance costs can pose a significant burden to small businesses and the employees they hire. However, there are tax incentives available to help offset those expenses. As with most tax deductions or credits, eligibility for the health insurance deduction has some limitations.
The Affordable Care Act (ACA) also has some impact on how the deduction works for businesses and their employees in particular. Let’s take a look at what you need to know about whether you can deduct health insurance expenses as a small business owner, what expenses qualify, and how much you can deduct if you meet the requirements.
What is the Small Business Health Care Tax Deduction?
The Small Business Health Care Tax Deduction allows small businesses and self-employed individuals to deduct a portion of their health insurance premiums on their income taxes. It sets up a system that makes health insurance similar to other business expenses that can be written off, such as computers and other resources needed to do business.
Insurance costs are a significant portion of a business’ expenses. While larger companies have the ability to use their size and economy of scale to offset these costs, smaller businesses do not. They have fewer people in their insurance programs and less negotiating power, which makes it harder to offset costs.
Allowing small businesses to deduct insurance costs on their taxes frees up capital for hiring staff and investing in the business. It can also be helpful during hard economic times when small businesses are especially vulnerable.
How the Small Business Health Care Tax Deduction Works
The deduction was put in place in 2010 as part of the Affordable Care Act (ACA). It allows businesses to deduct the amount they spend on health insurance for themselves, their employees, and their families.
The deduction is only available to businesses that have fewer than 50 full-time employees and average annual wages below $55,000. This includes companies that are required to have insurance since they exceed the 25 staff member minimum. However, the deduction applies differently to companies with less than 25 employees.
How Much Can a Qualified Small Business deduct?
The amount that a qualified business can deduct on their taxes each year is capped at the percentage of their premium costs that they pay. Essentially, they can deduct the amount that they actually pay in premiums each year. For a business that has premiums of $100,000 but splits insurance costs with employees at 50% can only deduct $50,000 at most. If the company only pays for $40,000 in premiums due to employees leaving or other reasons, it can only deduct the $40,000 that it paid.
Self-Employed Business Owners Deduct 100%
If you are self-employed, you can deduct the total amount you pay for health insurance premiums on your taxes. Self-employed individuals often pay a higher amount in taxes because they pay business taxes on top of personal income taxes. This is likely why the percentage that they can deduct on health insurance costs is higher.
Qualified Small Business Health Insurance Costs
The costs for health insurance premiums and out-of-pocket medical expenses that a qualified business can deduct include any premiums paid to cover health insurance for yourself, your spouse, your dependents, and any employees working more than 30 hours per week.
Health insurance costs that qualify for the Small Business Health Care Tax Deduction also include out-of-pocket medical expenses.
Limitations On The Small Business Health Insurance Deduction
There are several limitations on the health insurance costs that you can deduct. If you plan on claiming the deduction, make sure that your business stays within these guidelines. Otherwise, you will have a higher tax bill at the end of the year than you expected.
Federal and State Insurance Exchanges
For a company that provides health insurance to its employees to qualify for the Small Business Health Care Tax Deduction, the insurance must be provided through a state- or federally-operated exchange. If the company provides health insurance through a private health insurance company, the premiums do not qualify.
Deductions Cannot Exceed Business Income
The amount that you can deduct is limited to the amount of business income you report on your taxes. For example, if your business earns $100,000 in annual income, the most you can deduct is $100,000. This stops any company from deducting more than they earn and being owed money by the government.
The Credit Changes Above 25 Employees
If your company has 25 or fewer employees and they each make $27,000 or less, then you can get the full tax credit. Once your company reaches 26 employees or $27,001 average salaries, the tax credit starts to diminish. It continues to slowly diminish up to 50 employees and $55,000 average salaries.
Can Small Businesses Deduct Other Health Care Costs?
Health insurance coverage is not the only medical expense a small business can deduct. A qualified business can deduct any out-of-pocket medical expenses (including health insurance premiums) paid for themselves, their spouses, their dependents, and any employees who work more than 30 hours per week.
Other expenses that can be deducted include prescription medications and drugs, co-pays, medical equipment, fees for psychological treatment, eye care, dental care, orthodontia, and other dental expenses.
Deductions for medical expenses are subject to a threshold that increases every year. It may not be a major deduction, but every little bit can help offset care costs.
Why Deducting Business Expenses is Important for Small Businesses
Taking tax deductions is important for small businesses because it effectively lowers how much they owe in taxes. The more your business can deduct, the less you have to give the government. Saving substantially on your taxes means that you can also use the money to invest in the business, fuel growth and expansion, and survive hard times more easily.
Small businesses often run a tight ship when it comes to balancing costs with income. Shaving a few thousand dollars off of taxes may mean the difference between being profitable and not. Tax deductions are an easy way for companies to reduce their bottom line without having to reduce what they invest in employee benefits and other areas of the business.
What Other Business Expenses Can Small Businesses Deduct
You can deduct a variety of expenses from your small business tax return. Here are some of the most common deduction options that you can take besides health care costs.
If you run a manufacturing business, you can deduct the cost of raw materials that are consumed in the manufacturing process. Raw materials include both direct expenses, like the cost of scrap metal, and indirect expenses, like the cost of cooling water.
If you were required to travel for work purposes, you can deduct some travel expenses from your small business tax return. This includes transportation costs that you incur when traveling for business purposes, as well as meal and lodging costs incurred during your travel.
If you have to pay for utilities like electric, heating, water or sewer during the course of your business operations, you can deduct these expenses from your small business tax return. The caveat is that you have to work in the place that you pay utilities for. In some cases, this can apply to a home office if you live and work there, provided that you have a dedicated office space.
If you have to purchase items like pens, paper, books, and other office supplies for your small business, you can deduct these expenses from your tax return. This goes for equipment that you need to run your business, such as printers and computers. This includes office furniture. This greatly reduces the end costs of setting up office space for you and your staff.
Some of your travel expenses are possibly deductible, especially if they’re used for business reasons. Generally, you will be able to deduct the cost of traveling on behalf of your business if you were required to do so.
Small businesses are an important part of the economy in many ways. Letting them deduct healthcare costs from taxes not only improves their chances of surviving, it also makes them competitive against larger businesses that can easily offset the cost of healthcare programs.
As a small business owner, you have probably looked for several ways to reduce overall costs and improve operations. While tax deductions reduce costs at the end of the fiscal year, there are other things that you can do. You can do this in several ways, including outsourcing administrative tasks, without reducing the quality of your services. Let us help you improve the relationship with your customers by making phone-based services available at all times.
If you’re ready to get started with a professional answering service, we’re here to help. Contact Answer Aide by calling (866) 427-3500 or by filling out our online form. We’re happy to partner with you to support your business while it grows.