Understanding payroll taxes and health insurance

If you are running payroll for your small business, there’s a good chance you may also be handling health insurance. Both can be tricky topics, especially if it is your first time handling them. But you can set yourself up for success by understanding the ways in which health insurance and payroll can interact, so you can optimize how you handle both.

Health insurance contributions and payroll

Employer-sponsored health insurance can be a great benefit to offer your employees. If you have between one and fifty employees, then you are going to be looking at small group health insurance. If you have more than fifty employees, you are going to be looking at large group health insurance. Those larger business typically offer health insurance to their employees because they face penalties if they do not. But many small businesses offer insurance as well, to benefit their employees. 

Pre-tax contributions

In many cases employer-sponsored health insurance premiums are pre-tax for both employee and employer. If you offer a Section 125 qualified plan, then premiums will be pre-tax. That means that employer contributions won’t be subject to payroll taxes, plus employee deductions won’t be subject to payroll taxes. This can be a big tax savings to your business and to your employees.

When running payroll, make sure to make any benefit contributions and deductions before you calculate and withhold taxes. Then you can take that money to make premium payments on time for your plans. It is also a good idea to check that these benefit contributions are being properly recorded on pay stubs so your employees have a record of how much money is being put towards their insurance.

Other health-related benefits

There are other health related benefits that can be qualified pre-tax plans that you may want to offer to your employees. This includes Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and supplemental health insurance coverage. If you are interested in offering any of these plans, make sure to talk to your insurance broker. 

Health insurance tax forms

If you have a large (50+ employee) business that offers health benefits to your employees, there will be some associated tax forms that you need to take care of. The most important forms to know about are Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and

Coverage Information Returns and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. These forms tell the IRS about the health insurance you offered and report key info to employees so they can complete their own taxes. 

S-Corp owners health insurance

Generally employer-sponsored health insurance has pre-tax premiums, but there is a notable exception, which is health insurance for owners of S-Corporations.  

Post-tax contributions 

If you are a greater than 2% shareholder of an S-Corp and your company pays for any health and accident insurance premiums, those premiums are subject to taxes like regular wages. So make sure that no pre-tax deductions or contributions are made via payroll, and do include the cost of those premiums in your taxable wage base. 

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