Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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Payroll health insurance premiums may be taxable depending upon the state where you reside and the way your health insurance premiums get paid. Health insurance is one of the main benefits that get final consideration by an employee when considering employment and one of the most attractive features offered by an employer.

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Health insurance is necessary but it can be expensive. Purchasing it through group insurance with your employer may net you better benefits for a cheaper premium than if you bought health insurance privately.

Most employers deduct your share of the health insurance plan from your payroll. Since your paycheck is reduced by this portion, that portion is generally not taxable as income.

When you enroll in a group health insurance plan, you usually agree to have your share of the health insurance premium deducted from your payroll check. This method guarantees the employer that he has your portion of the premium so that he can pay the insurance company directly and it also helps you fund the health insurance plan without trying to come up with the money each month. Usually the money is deducted from each paycheck, so the premium is prorated based on if you get paid weekly, semi-monthly, or monthly.

Whether you are paying for your entire health insurance premium yourself or if your employer is making contributions for you, however much of your premium is deducted from your payroll check is usually not considered taxable for you for income purposes. This is because payroll deductions reduce your wages and therefore reduce your income. You only pay income tax on the income you actually received.

For example, your employer offers you health insurance through the company. The employer pays half and you pay half, so out of the $400 per month total premium, your share comes to $200 per month. You earn $500 per week for your salary and $50 gets deducted from your pay check every week to pay toward the $200 monthly premium.

Now your reported income on each pay check is $450 and not $500 so you only pay federal income tax withholding, federal unemployment tax (FUTA), Social Security, and Medicare on the $450 you earned. Your payroll health insurance premiums are not taxable.

Paying Your Employer Directly for Your Health Insurance Premiums

Some employers offer health insurance premiums but do not collect the employee’s share of the premium through payroll. In these circumstances, the employee writes a check or pays cash to his employer every month for his share of the premium.

When health insurance premiums are paid this way, the health insurance premiums do not receive an income tax break. This is because the health insurance premiums are no longer paid through payroll and your income is no longer reduced accordingly. When given the option, it is usually in your best interest to opt for payroll deductions. In this case you may wish to look into private online health insurance rates using the free quote tool on this page.

All medical expenses can be deducted from your income tax reporting once you reach a certain ratio of medical expenses to income generated. However, this is usually a substantial amount and does not apply to many people. Your medical and/or dental expenses must exceed more than 7.5% of your adjusted gross incomes in order to qualify.

This means if your adjusted gross income is $50,000 you must have more than $3,750 in medical expenses in order to deduct them from your income tax reporting. Health insurance premiums do not count toward medical expenses.

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Other Taxable Health Insurance Premiums

If you do not have group health insurance that is deducted from payroll or reimbursed directly to an employer, then you probably pay for private health insurance. There is no tax break for health insurance premiums when they are paid for directly to an insurance company, agent, or broker.

Since you are not paying for your health insurance through a payroll check your income reporting is not reduced by that premium amount. You will pay income taxes based on the income shown on your payroll check.

There are many rules when it comes to state and federal taxation and frequently the laws vary from state to state. The IRS (Internal Revenue Service) has its own set of rules as well. In order to fully understand if payroll health insurance premiums are taxable it is best to review all guidelines. Check state laws, federal laws, and IRS rulings to determine how your taxes are affected by your health insurance premiums.

Group health insurance is usually taken care of directly through payroll which typically reduces your income by the amount of the premium. However, there are also times when you may not have group insurance and you need to pay for private health insurance. While private health insurance is not going to provide you with an income tax break, it will give you health benefits that can prove to be more valuable than any tax break would be.

Enter your zip code to start shopping for your health insurance quotes now.