In our recent blog posts in the Business Taxes series, we’ve been discussing all of the different fundamental components of the businesses taxes your business might be responsible for if it has employees. These taxes are also commonly referred to as payroll taxes or employment taxes, since they are the taxes a business is required to pay because it has employees. As we’ve mentioned before though, the type of employees your business employs makes a huge difference in the paperwork and tax responsibilities the IRS requires of your business.
There are two main types of employee classifications: 1099 independent contractors and W-2 employees. In our previous posts Business Taxes: 1099 Independent Contractors and Business Taxes: Form 1099-NEC, we discuss the different requirements for employers working with 1099 independent contractors. In one of the following posts, we also discuss the different IRS requirements when hiring part time or seasonal help (learn more here: Business Taxes: Employment Tax Withholdings for Part Time or Season Help. In today’s blog post, we’ll continue discussing the requirements and tax responsibilities of a business with W-2 employees. More specifically, we’ll discuss the business tax ramifications of paying for health plans for your employees, as well as their spouses and dependents.
Employment Taxes and Employee Health Plans
As of January 31st, 2021, according to the IRS Page Employee Benefits, “if an employer pays the cost of an accident or health insurance plan for his/her employees, including an employee’s spouse and dependents, the employer’s payments are not wages and are not subject to Social Security, Medicare, and FUTA taxes, or federal income tax withholding. Generally, this exclusion also applies to qualified long-term care insurance contracts. However, the cost of health insurance benefits must be included in the wages of S corporation employees who own more than two percent of the S corporation (two percent shareholders).”
This is a very important piece of information to take note of if your business pays for the health insurance of your employees and their spouses or dependents. This means that the payments made for health insurance are not counted as wages and are not subject to the typical employment and payroll taxes. What this means is that if a business can include health insurance in an employee’s benefits as a substitute for a similar amount of pay, that business could save on taxes in the long run, since the payments for health insurance are not taxed the same way that wages of a similar amount would be.
The same IRS Page from the previous excerpt, Employee Benefits, as of January 31st, 2021, continues on to say that “health insurance programs allow workers and their families to take care of essential medical needs. A health plan can be one of the most important benefits provided by an employer. The Department of Labor’s Health Benefits Under the Consolidated Omnibus Budget Reconciliation Act (COBRA) provides information on the rights and protections that are afforded to workers under COBRA.”
Without employer-sponsored or paid for health insurance, many people end up foregoing health insurance altogether and this can leave them and their families vulnerable to high costs later on if there’s ever an emergency. Thankfully, as we’ve learned today, the IRS actually incentives employers to purchase health insurance for their employees, since like we said before, the health insurance payments are not taxed like wages. This creates a win-win scenario for both the employers and the employees!
In our next blog post, we’ll discuss other business taxes and employee benefits. More specifically, we’ll be talking about what the IRS calls ‘fringe benefits.’ Check back soon!