5 Hidden Tax Credits for Small Employers Offering Health Benefits


As a small business owner, providing health benefits often feels like a steep uphill climb. You want to offer a competitive package to keep your best people, but the monthly premiums can weigh heavily on your cash flow. However, many entrepreneurs are leaving money on the table simply because they aren't aware of the specific incentives tucked away in the tax code.

Beyond the standard deduction for business expenses, the federal government offers several "hidden" ways to slash your tax bill and offset the cost of care. If you are looking to provide high-quality medical coverage while maximizing your bottom line, these five tax advantages are essential to your financial strategy.

1. The Small Business Health Care Tax Credit

This is perhaps the most significant yet underutilized incentive for small firms. If you have fewer than 25 full-time equivalent (FTE) employees and pay an average annual wage below a certain threshold (currently indexed around $67,000), you may qualify.

  • The Benefit: A credit worth up to 50% of your contribution toward employee premiums (35% for tax-exempt organizations).

  • The Catch: To claim it, you generally must purchase your group plan through the Small Business Health Options Program (SHOP) and cover at least 50% of the premium cost for your team.

  • Pro Tip: This is a credit, not just a deduction. It reduces your tax liability dollar-for-dollar, which is far more valuable than a standard deduction.

2. Payroll Tax Savings via Section 125 "Cafeteria" Plans

A Section 125 plan—often called a Premium Only Plan (POP)—allows employees to pay their portion of insurance premiums using pre-tax dollars. While this is a great perk for workers, it offers a "hidden" win for you as the employer.

  • The Benefit: Because employee contributions are taken out before taxes, that money is not subject to the employer’s share of FICA (Social Security and Medicare) or FUTA (Federal Unemployment) taxes.

  • The Savings: For every dollar an employee contributes to their health plan pre-tax, you save approximately 7.65% in payroll taxes. Over a full year and several employees, this adds up to thousands of dollars in pure savings.

3. Tax-Free Reimbursements with QSEHRAs

The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a game-changer for businesses with fewer than 50 employees that don't want the hassle of managing a traditional group plan.

  • The Benefit: You set a monthly allowance, and employees buy their own individual health insurance on the open market. You then reimburse them for their premiums and out-of-pocket medical expenses.

  • The Tax Edge: These reimbursements are 100% tax-deductible for the business and 100% tax-free for the employees. Unlike a standard bonus or salary increase, no payroll taxes are triggered for either party.

4. Employer Contributions to Health Savings Accounts (HSAs)

If you offer a High Deductible Health Plan (HDHP), you can pair it with a Health Savings Account (HSA). While many owners know employees can contribute to these, many don't realize the benefits of the employer making a contribution.

  • The Benefit: Any money you deposit into an employee’s HSA is a deductible business expense.

  • The Hidden Perk: Much like the Section 125 plan, employer HSA contributions are exempt from federal payroll taxes. It is a way to "boost" an employee's compensation package more cheaply than a traditional raise because you aren't paying the 7.65% FICA tax on that contribution.

5. State-Specific "Wellness" and Access Credits

Depending on where your business is located, your state may offer additional incentives that go beyond federal law. Some states provide "Wellness Credits" for companies that implement health-tracking or smoking-cessation programs.

  • The Benefit: Direct credits or grants to help cover the cost of implementing wellness initiatives.

  • The Retention Factor: These programs help lower your long-term insurance claims by keeping your workforce healthier, which can prevent "premium creep" in future years.

Strategic Implementation for Your Business

To take full advantage of these credits, it is important to document your plan correctly from the start. Missing a deadline for a SHOP enrollment or failing to have a written Section 125 plan document can disqualify you from these savings.

By stacking these incentives—for example, using a SHOP plan to get the 50% credit while utilizing a Section 125 plan to reduce payroll taxes—you can often provide health insurance at a fraction of the "sticker price" you see on a quote.


Ultimate Guide to Small Business Health Insurance: Boosting Retention and Maximizing Tax Savings