Are employee health insurance premiums subject to medicare tax

Table of Contents Show

Federal Taxable Income
No Medical Expenses Deduction
State Income Taxes
Is health insurance premium exempt from FICA?
What wages are subject to Medicare tax?
Is health insurance pre
Is employer health insurance pre

Pretax medical insurance is exempt from federal income taxes.

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Health insurance isn't cheap, even if you're paying for coverage under an employer plan. However, using pretax dollars to pay for the plan helps you when it comes time to pay your taxes, because the money taken out of your paycheck to cover your premiums isn't counted as taxable income for certain types of taxes.

Federal Taxable Income

Any medical premiums you pay with pretax dollars aren't counted in your taxable income. When your employer prepares your W-2, your employer won't include these premiums in box 1, your income subject to federal income tax. Instead, your employer reports the amount of the premiums in box 12 with the code DD. This figure includes the total of what you and your employer both paid toward health insurance. For example, say your compensation is $50,000, but that includes $4,500 of premiums you paid and $6,000 your employer paid. Your W-2 would show $45,500 in box 1 and $10,500 in box 12 with the code DD.

No Medical Expenses Deduction

Pretax health insurance premiums won't qualify for the medical and dental expenses deduction because the costs are paid with untaxed income. But, don't sweat it too much. The deduction only counts the portion of your expenses that exceed 10 percent of your adjusted gross income and you have to itemize to claim what you can. By having the premiums paid with pretax dollars, you essentially get the deduction without any hoops to jump through.

FICA Taxes

Your pretax medical insurance premiums are hit with Federal Insurance Contributions Act taxes, also known as FICA taxes. These include the Social Security tax and the Medicare tax. Therefore, when you get your W-2, your box 3, income subject to Social Security taxes, and box 5, income subject to Medicare taxes, will include your pretax health insurance premiums. For example, even though your box 1 income went down to $45,500 because of your premiums, box 3 and box 5 will still show $50,000 of income.

State Income Taxes

On the bright side, you also get to exclude your pretax insurance premiums from your state income tax as well. Depending on where you live, this could be a substantial additional tax break. Of course, if you live in a state without an income tax to begin with, it won't help you -- but you didn't have to pay any state income tax in the first place.

References

Writer Bio

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

Feb. 18, 2009 /
2 min read

Feb. 18, 2009 /
2 min read

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Dear Tax Talk, My employer takes out about $300 a month for health insurance from my gross pay, and I am told that this is before taxes to save me money. However, when I get my W-2 form, all the money I pay for health insurance is included as “wages, tips and compensation,” so it really saves me nothing at tax time.

I have argued this point with them, but they say that they have to include it. I don’t believe this is right, because there is then no real tax saving advantage, as I pay Social Security taxes, as well as Medicare, federal and state taxes on everything, including what I paid in for health insurance. What’s right?
— Dave

Dear Dave,
You must be working for really dumb people. Employers generally establish a health insurance plan to be payroll tax-free. The employee saves some payroll and income taxes, but the employer makes out better by not having to match the payroll taxes. In your case of $3,600 a year, you save FICA and Medicare tax of 7.65 percent and an income tax that can be 10 percent or more if you have a semi well-paying job.

There is a matching 7.65-percent payroll tax savings to your employer as well. While that may only mean $275 for you, when your employer multiplies it by all the employees, it can add up quickly.

In order for the payroll reductions for health insurance to be tax-free, the employer has to establish a cafeteria plan. A cafeteria plan is a benefit plan that offers the employee the option to forgo part of his or her compensation on a tax-free basis in order to provide certain fringe benefits.

Cafeteria plans come in various sizes and shapes and differ from employer to employer. A basic cafeteria plan is called a premium-only plan. The plan only provides for the exclusion from income and payroll taxes the amount of health insurance premium deducted from the employee’s wages. The plan is simple to administer, as it only requires the employer to deduct the premiums from the employee’s paycheck, which is something that they would do whether or not tax-favored.

The plan is tax-free is because part of your pay covers the cost of the insurance. Suppose you make $50,000 annually. If your employer gave you the full $50,000, all of it would be subject to payroll taxes, including income taxes. Now, if the employer establishes a premium-only plan, and says to you I can offer you health insurance for $300 a month, your salary becomes $46,400 plus $3,600 in benefits.

Because health benefits are favored under the law, you avoid paying payroll taxes on that part of your salary reduction. If, instead of health insurance, your employer offered you a car for $300 a month, the $300 continues to be taxable, as a car allowance is not an excludable fringe benefit.

Your employer must establish a plan in order to provide you with the tax-free benefit. Most qualified health insurance agents will provide a plan and administration as part of the sale of the health plan. I hope this makes sense to your employers.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

Is health insurance premium exempt from FICA?

Section 125 of the Federal Tax Code permits employers to treat employee health insurance premiums as an employer-paid benefit not subject to federal and state income taxes and Social Security (FICA) taxes.

What wages are subject to Medicare tax?

All covered wages are subject to Medicare tax and there is no wage base limit. For more information, see Publication 15, (Circular E), Employer's Tax Guide from the IRS.

Is health insurance pre

Also, pre-tax medical premiums are excluded from federal income tax, Social Security tax, Medicare tax and typically state and local income tax.

Is employer health insurance pre

Employer-sponsored plans are typically pre-tax deductions for employees. In most cases, deduct the employee-paid portion of the insurance premiums before withholding any taxes. However, pre-tax health insurance premiums may not come out before you withhold or contribute certain taxes.