The Hidden Tax Benefits of Offering Better Health Insurance

For tech companies under 250 employees, health insurance often feels like a necessary expense—a line item that keeps talented people on your payroll but drains resources from other priorities. What many leadership teams miss, however, is that offering quality health insurance isn’t just about retention and recruitment. It’s one of the most powerful tax strategies available to small and mid-sized businesses.

Understanding the tax benefits of offering health insurance can transform how you view this investment, potentially saving your company tens of thousands of dollars annually while building a healthier, more productive team.

The Dual Tax Advantage: Deductions and Exclusions

When you provide health insurance to your team, you’re accessing two distinct tax benefits that work together to reduce your overall tax burden.

100% Premium Deductibility

The employer contributions you make toward health insurance premiums are fully tax-deductible as a business expense. This isn’t a partial deduction or a credit with complex qualifications, it’s a straightforward reduction in your taxable income.

For a tech company with 50 employees paying an average of $7,000 annually per employee for individual coverage, that’s $350,000 in deductible expenses. At a 21% corporate tax rate, this deduction alone saves approximately $73,500 in federal taxes.

Payroll Tax Savings

Beyond the income tax deduction, employer contributions to health insurance are exempt from payroll taxes. This means you avoid paying the employer’s share of Social Security and Medicare taxes (7.65%) on the amount you contribute toward premiums.

Using the same example, that $350,000 in health insurance contributions saves an additional $26,775 in payroll taxes. Combined with the income tax deduction, your effective cost for providing $350,000 in health benefits drops to approximately $249,725—a total tax savings of over $100,000.

The Small Business Health Care Tax Credit

For qualifying tech startups and smaller companies, the tax benefits extend even further through the Small Business Health Care Tax Credit. This often-overlooked provision can cover up to 50% of the premiums you pay for your employees.

To qualify, your company must meet these criteria:

Fewer than 25 full-time equivalent employees
Average employee wages of approximately $65,000 or less per year
Coverage of at least 50% of employee-only premium costs
Offering health plans through the Small Business Health Options Program (SHOP) Marketplace

Tom Brock, a licensed CPA and CFA charterholder, explains how this works in practice: “Consider a small business with 10 employees where five elect single coverage at $4,000 each and five choose family coverage at $10,000 each. The total premium equals $70,000. If the employer pays half, or $35,000, they’re eligible for a tax credit of $17,500.”¹

The credit operates on a sliding scale—the smaller your team and the lower your average wages, the larger your credit. Even if you don’t owe taxes in a given year, you can carry the credit forward or backward to other tax years, and the health insurance premium payments beyond the credit amount remain deductible.²

Pre-Tax Employee Contributions: A Win-Win Scenario

When employees contribute to their health insurance premiums through a Section 125 cafeteria plan, their contributions are made with pre-tax dollars. This creates value for both parties.

For employees, pre-tax contributions reduce their taxable income, lowering their federal income tax, Social Security, and Medicare tax obligations. An employee earning $50,000 who contributes $1,400 annually to health insurance saves approximately $308 in federal taxes (assuming a 22% bracket) plus an additional $107 in payroll taxes—a total savings of $415.

For employers, these pre-tax employee contributions reduce your payroll tax liability as well, since you’re only paying payroll taxes on the post-deduction amount.

Strategic Tax Planning with Health Savings Accounts

Health Savings Accounts (HSAs) paired with high-deductible health plans offer additional tax advantages that appeal to many tech workers who appreciate financial flexibility.

For 2025, individuals can contribute up to $4,300 for self-only coverage and $8,550 for family coverage to an HSA.³ These contributions are:

Tax-deductible for the contributor
Exempt from payroll taxes when made through employer payroll
Tax-free when withdrawn for qualified medical expenses
Portable, following employees if they change jobs

Employer contributions to employee HSAs are also fully deductible and exempt from payroll taxes. This creates an attractive benefit that costs you less than traditional compensation while providing significant value to your team.

The Hidden Cost of Not Offering Insurance

While the tax benefits of offering health insurance are substantial, it’s worth considering what you’re leaving on the table by not providing coverage.

Without employer-sponsored insurance, employees must purchase individual coverage with after-tax dollars. A $7,000 annual premium costs an employee in the 22% tax bracket approximately $8,974 in pre-tax earnings. By offering that same coverage, you’re providing $7,000 in value while your actual cost (after tax benefits) is approximately $4,933—a more efficient use of your compensation dollars.

Moreover, employees increasingly view comprehensive health benefits as non-negotiable. According to Willis Towers Watson’s Global Benefits Attitudes Survey, 51% of employees cite benefits as a key reason for staying with their current employer—up from 35% in 2017.⁴ Additional research shows that 81% of employees consider an employer’s benefits package important when determining whether to accept a job.⁵ In competitive tech hiring markets, the absence of quality health insurance can significantly increase your recruiting costs and employee turnover.

Maximizing Your Tax Benefits

To capture the full tax advantages of health insurance:

Document everything properly. Ensure your health insurance expenses are correctly categorized in your accounting system and that you’re maintaining the necessary documentation for tax filings.

Explore the SHOP credit. If you have fewer than 25 employees, file Form 8941 to determine your eligibility for the Small Business Health Care Tax Credit. Many qualifying companies overlook this substantial benefit.

Implement a Section 125 plan. Allow employees to make premium contributions on a pre-tax basis, reducing payroll taxes for both your company and your team members.

Consider HSA-eligible plans. For tech companies with younger, healthier workforces, high-deductible health plans paired with HSAs can provide compelling tax advantages and lower overall premium costs.

Leverage group buying power. Organizations like Aspireship aggregate smaller companies to access enterprise-level benefits at better rates, improving your tax efficiency while enhancing coverage quality.

Work with tax professionals. The intersection of health benefits and tax law is complex. A qualified CPA can help you optimize your approach and ensure you’re not missing available deductions or credits.

The Strategic Value Beyond Taxes

While the tax benefits of offering health insurance are substantial, they’re part of a larger strategic picture. Companies that provide comprehensive health coverage report higher employee satisfaction, better retention rates, and improved productivity. Research shows that businesses with generous health coverage have turnover rates 27% lower than companies with no health plan or minimal offering.⁶ When employees have access to preventive care and aren’t worried about healthcare costs, they’re more engaged and effective in their roles.

The tax code recognizes the societal value of employer-sponsored health insurance by making it one of the most tax-advantaged employee benefits available. For tech companies competing for talent while managing tight budgets, understanding and leveraging these benefits isn’t just smart tax planning—it’s a competitive necessity.

Taking Action

The small business tax deductions for health insurance are among the most valuable tools available to growing tech companies. By treating health insurance as a strategic tax investment rather than merely an expense, you can build a stronger team while significantly reducing your effective costs.

If your company is exploring health insurance options or looking to optimize your current benefits structure, consider how group purchasing arrangements can help you access better coverage at lower net costs. When you factor in the full range of tax benefits—premium deductions, payroll tax savings, potential tax credits, and the efficiencies of pre-tax employee contributions—the financial case for offering quality health insurance becomes compelling. When you’re ready to start looking at options, reach out to us and we can help you find the best choice for your company.

The hidden tax benefits of offering health insurance aren’t just about reducing your tax bill. They’re about building a sustainable compensation strategy that attracts talent, supports your team’s wellbeing, and makes efficient use of every dollar you invest in your people. In competitive tech markets where every advantage matters, understanding these benefits isn’t optional—it’s essential.

Sources

Additional Resources:

Kaiser Family Foundation. “2025 Employer Health Benefits Survey.” KFF.org, https://www.kff.org/health-costs/2025-employer-health-benefits-survey/
Premium cost averages based on KFF 2024-2025 employer health benefits data showing single coverage ranging from $8,951-$9,325 annually

Footnotes

Brock, Tom. “Small Business Health Care Tax Credit: What It Is & How to Get It.” OnPay, https://onpay.com/insights/small-business-health-care-tax-credit/
Internal Revenue Service. “Small Business Health Care Tax Credit and the SHOP Marketplace.” IRS.gov, https://www.irs.gov/affordable-care-act/employers/small-business-health-care-tax-credit-and-the-shop-marketplace
Internal Revenue Service. “Revenue Procedure 2024-25: 2025 HSA Contribution Limits.” IRS.gov, https://www.irs.gov/publications/p969
“How Employee Insurance Benefits Impact Retention.” BenefitHub, https://www.benefithub.com/blog/how-employee-insurance-benefits-impact-retention
“Why Do Employers Offer Health Insurance?” PeopleKeep, 2024 Employee Benefits Survey, https://www.peoplekeep.com/blog/why-do-employers-offer-health-insurance
“Health Benefits Are Key to Employee Retention.” HSA for America, https://hsaforamerica.com/blog/health-benefits-are-key-to-employee-retention/

Tax Benefits of Health Insurance for Small Business