When small business owners look at offering health insurance, the first question is almost always “What will it cost?” The second one should be “What will it save me at tax time?”
Before I became a health insurance agent, I worked as a public accountant, and I still see owners leave money on the table because nobody walked them through the tax side. The short answer: yes, health insurance you provide for employees is generally tax deductible, and there are several other tax breaks that can make a group plan more affordable than it looks on paper.
Here are the four worth knowing before you set up or renew coverage for 2027.
1. Your share of employee premiums is a business expense
What your business pays toward employees’ health insurance premiums is generally deductible as an ordinary and necessary business expense, the same way wages are. On the employee side, that coverage isn’t counted as taxable income, so it’s a benefit they don’t pay income tax or payroll tax on.
Compare that with handing out a raise so employees can buy their own coverage: the raise is taxable to them and adds to your payroll taxes. Dollar for dollar, a premium contribution usually goes further.
2. A Section 125 plan lets employees pay their share pre-tax
Most group plans ask employees to pay part of the premium through payroll. With a Section 125 “premium only plan” (POP), that payroll deduction comes out before taxes. Employees save income tax and Social Security and Medicare (FICA) tax on their share, and the business saves its matching 7.65% FICA on those dollars too.
- It requires a written plan document. Your payroll provider or a benefits administrator can usually set one up at a low cost.
- Elections are generally locked in for the plan year unless the employee has a qualifying life event.
- Sole proprietors, partners and more-than-2% S corporation shareholders can’t pay their own premiums through a Section 125 plan. (Their options are covered below.)
3. The Small Business Health Care Tax Credit
Very small employers with modest average wages may qualify for a federal tax credit of up to 50% of the premiums the business pays (up to 35% for tax-exempt employers). The rules, under Internal Revenue Code section 45R and claimed on IRS Form 8941, are strict:
| Requirement | What it means |
|---|---|
| Fewer than 25 full-time-equivalent employees | The full credit goes to businesses with 10 or fewer FTEs; it shrinks as you approach 25. |
| Lower average wages | For 2026, the credit starts shrinking once average annual wages pass about $34,000 per FTE and disappears at roughly double that. The figure is adjusted each year. |
| You pay at least 50% of the premium | The business must pay a uniform percentage, at least half, of employee-only coverage. |
| Coverage bought through SHOP | The plan generally has to come through the Small Business Health Options Program (SHOP) Marketplace, and plan choices there vary by state and county. |
| Two years only | The credit is available for two consecutive tax years, starting with the first year you claim it. |
Owners and their family members generally don’t count as employees for the credit, and their wages and premiums are left out of the math. Because of the SHOP requirement and the wage limits, many businesses don’t qualify, but for a small, newer team it can be worth checking before you choose a carrier.
4. HSA contributions on a high-deductible plan
If you offer an HSA-qualified high-deductible health plan, the business can contribute to employees’ health savings accounts. Employer HSA contributions are deductible for the business and tax-free to the employee, and employees can add their own pre-tax contributions through a Section 125 plan.
For 2027, the IRS limits (Rev. Proc. 2026-24) are $4,500 for self-only coverage and $9,000 for family coverage, plus a $1,000 catch-up for people 55 and older. Those limits include both employer and employee contributions.
What about the owner’s own coverage?
How your own premiums are treated depends on how your business is set up:
- C corporation owners who work in the business are treated like any other employee, so their coverage gets the same tax treatment.
- S corporation owners (more than 2%): premiums the company pays are added to the owner’s W-2 wages, and the owner can then generally take the self-employed health insurance deduction on their personal return.
- Sole proprietors, single-member LLCs and partners usually use the self-employed health insurance deduction. I cover that in Self-Employed Health Insurance in Florida.
These rules have fine print, so it’s worth a quick conversation with your CPA before year-end.
Don’t want a group plan? HRAs have tax perks too
If a traditional group plan doesn’t fit your team, a QSEHRA or ICHRA lets your business reimburse employees, tax-free, for individual health insurance they choose themselves, and the reimbursements are deductible for the business. See ICHRA vs. QSEHRA: Which Health Reimbursement Arrangement Fits Your Small Business?
And if you’re weighing a group plan now, two earlier articles will help:
- The November 15–December 15 Window explains how to start a group plan this year without the usual participation and contribution rules.
- Level-Funded vs. Traditional Group Health Insurance compares the two main ways to structure a small group plan.
Still figuring out whether you’re big enough for a group plan? Start with How Many Employees Do You Need for Group Health Insurance in Florida? And if you already have a plan, our Small Business Open Enrollment Checklist and Employee Turning 65? guide cover the year-end details.
Frequently asked questions
Is health insurance for employees tax deductible for a small business?
Generally, yes. Premiums your business pays for employees’ health coverage are a deductible business expense, and the coverage isn’t taxable income to employees.
Do I need a Section 125 plan to offer group health insurance?
No, but without one, employees pay their share of the premium with after-tax dollars. A premium only plan is usually simple to set up and saves taxes for both the employees and the business.
Does my business qualify for the Small Business Health Care Tax Credit?
You may if you have fewer than 25 full-time-equivalent employees, pay lower average wages, cover at least half of employee-only premiums and buy coverage through SHOP. Your CPA can run the numbers on Form 8941.
Can I deduct my own health insurance as a business owner?
Usually, yes, but how depends on your business type. C corporation owner-employees are treated like employees. Sole proprietors, partners and more-than-2% S corporation shareholders generally use the self-employed health insurance deduction instead.
Are the rules different outside Florida?
These are federal tax rules, so they apply nationwide; your state may have its own income tax treatment. I’m licensed in all 50 states and can help wherever your business is.
Want to see what a plan really costs after taxes?
I’m Chris Puccio, an independent health insurance agent based in Boca Raton, Florida, licensed in all 50 states, and a former public accountant. I’ll compare group plans, HRAs and individual options for your business and show you which tax breaks fit, so you can make the call with your CPA. There’s no cost for the consultation.
Book a free consultation or call (561) 525-6965.
This article is general information, not tax, legal or accounting advice. Tax rules have exceptions and change over time; talk with your CPA or tax advisor about your situation. Plan availability, eligibility rules and terms vary by carrier and state. Figures were checked in November 2026 (IRS Form 8941 instructions for 2026; Rev. Proc. 2026-24 for 2027 HSA limits).
