Do your health insurance premiums scare you when FICA comes up? You’re not the only one! People often ask if their premiums are subject to Social Security and Medicare taxes. In this article, you’ll discover that premiums paid by an employee through a company-sponsored plan usually don’t have FICA taxes.
Employees who pay for health insurance through an employer-sponsored plan usually don’t have to pay FICA taxes. FICA taxes are Social Security and Medicare taxes, part of the federal tax system. It can be tricky to understand how health insurance premiums work with FICA taxes, so it’s essential to learn the basics before choosing a health coverage plan.
In this article, we’ll define FICA taxes, show how health insurance premiums affect them and give advice for getting the most out of your healthcare plan.
What is FICA Tax?
FICA stands for Federal Insurance Contributions Act. It’s a tax code from the IRS that sets up payroll taxes for Social Security and Medicare. FICA taxes are deductions from an employee’s paycheck. Employers often add to the tax as part of a healthcare plan or remuneration package.
Usually, if a company pays for an employee’s health insurance, it’s not subject to FICA taxation. But, if the employee pays with after-tax dollars, then those premiums may be taxed. Payments classified as wages must be reported on Form W-2 (for wages) or Form 941 (for self-employment income).
Employers must consider state laws for payroll taxes, like unemployment and disability insurance premiums. All payments made in payroll or through wages must be reported on W2 forms. Employers should stay informed of legislative changes that can affect taxes due in each taxable period. Employees and employers must report accurately throughout the year.
Are Health Insurance Premiums Subject to FICA?
Employee health insurance premiums paid through an employer-sponsored plan are exempt from FICA taxes. FICA includes Social Security and Medicare taxes. Contributions to an employee’s health plan do not count toward FICA taxes.
Employers must provide Social Security benefits for their employees if they pay over 50% of the premiums for the coverage. Employers cannot pass on their taxes to employees or deduct them from wages.
Self-employed individuals must pay two different sets of taxes: self-employment tax (which includes Social Security and Medicare taxes), and income tax based on net proceeds from self-employment activities. Self-employed healthcare expenses may be deducted for both income and self-employment tax purposes if all criteria under IRS rules have been met.
Employer-Sponsored Health Insurance Plans
Employers often provide health insurance for staff that is exempt from FICA taxes. These are Federal Insurance Contributions Act taxes, which are Social Security and Medicare taxes taken out of the employee’s paycheck each pay period. Employers must match their employees’ contributions. Plans vary in design and cost-sharing arrangements. Employees can contribute wages before deductions, reducing taxable income.
In some states, employers must reimburse premiums as wages subject to state unemployment insurance tax withholding. Such payments are not considered “wages” for federal income tax purposes and are not subject to FICA taxation rates. So, if an employee opts into an employer-sponsored plan, they won’t be taxed with FICA due to the exemption.
Self-Employed Health Insurance Plans
Self-employed people, not employed by someone else, can buy their own health insurance plan. These plans may be cheaper than employer plans but come with tax consequences.
Premiums paid with after-tax dollars usually don’t have FICA (Federal Insurance Contributions Act) taxes. So, copays, deductibles, and premiums are not taxed for Social Security and Medicare. You can use these costs for deductions when filing income taxes, helping you save money.
However, if a self-employed person gets medical coverage from their spouse’s employer-sponsored plan, insurance premiums become subject to FICA taxes. To understand deductions or FICA taxes for certain situations, contact a professional who specializes in understanding self-employed taxation for medical coverage.
Exemptions for Health Insurance Premiums
When it comes to FICA taxes and health insurance premiums, it depends on the situation. Generally, if an employee pays their premiums through an employer-sponsored plan, then those payments are exempt from FICA taxes – including Social Security and Medicare taxes – even if the employer pays part of the premium. Plus, any deductions from paychecks for health insurance premiums will also be excluded from taxes.
But note that FICA exemptions only apply when the premiums are paid via an employer. If an employee pays health insurance premiums directly, or through any other source outside of an employer-sponsored plan, then they may still be subject to FICA taxation.
If you need advice for your individual circumstances, it’s best to check with a tax professional.
Other Considerations
When deciding their approach to health insurance premiums, employers and employees should think of more than just FICA tax. If a plan is canceled due to unpaid premiums, the employee may have to pay for any premiums that weren’t paid. Make sure to understand these requirements to avoid owing more money.
COBRA continuation coverage should be obtained in case of a change in coverage or loss of coverage due to an employer. Other forms of financial assistance from the employer, like 529 contributions or tuition reimbursement, could be taxed and subjected to FICA taxes. All parties should understand their options and take precautions with taxes.
Conclusion
Wrapping up, health insurance premiums paid by an employee through their employer-sponsored plan are usually not subject to FICA taxes. This includes Social Security and Medicare taxes. This means employees can save money on their monthly payments. It also eases the pressure on employers and businesses that offer health insurance plans.
Knowing and understanding the tax rules related to health insurance premiums is important before choosing if they want to join an employer-sponsored health insurance plan.
