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Do We Need to Pay Taxes on Employer-Paid Health Insurance?

Generally, employees covered under a group health insurance plan do not pay taxes on their insurance. The employer may cover all or a portion of the premium, which is the amount the insurer charges for coverage. When the employer and employee share in the cost of the premium, in most cases the employee pays a pre-tax contribution through a payroll deduction. Due to IRS laws for coverage of domestic partners, the entire contribution may be taxable.

  1. Tax Savings

    • Instead of paying taxes, employers may save on taxes by offering group health insurance. In most cases, the IRS allows the employer to claim the health insurance premiums costs as a deduction from its taxes. Employers may also get a break on its payroll taxes by offering group coverage. Employees contribute through a pre-tax payroll deduction, thereby reducing the employee's taxable income.

    Tax Deductions

    • Opening a Flexible Spending Account or Health Savings Account will ease your tax burden. These accounts may be available through your employer, depending on the type of group health plan offered. As with premium payroll deductions, you can contribute pre-tax dollars to these accounts, reducing your taxable income. You cannot take any direct medical expense deductions, such as premium or doctor's office costs, during the time you participated in an employer-sponsored group health plan.

    Premiums and Payroll Deductions

    • With group plan billing, your company pays the premium for your health plan. This billing is typically based upon the number of employees enrolled in the health plan. Your employer may cover all or a portion of the premium. If it pay for all of the costs, you will not be responsible for any premium cost. If you and the company share in the costs, your company will deduct the appropriate amount from your paycheck to cover the insurance premium.

    Out-of-Pocket Costs

    • Though you may not pay taxes on your health care, depending on the type of plan selected, you may incur other out-of-pocket costs. In addition to the payroll deduction for the premium, many plans have deductibles, co-insurance and co-pays. The deductible is a dollar amount you must pay out before the insurance will pay for services. Co-insurance is the shared amount between you and the insurer for services rendered. For example, an 80 percent co-insurance means the insurer pays 80 percent and your co-insurance responsibility is 20 percent. Co-pays are amounts you pay at the time of service.

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