The Problem with Paying Health Insurance by a Salary Bonus
Some employers prefer giving their employees more money and letting them purchase their own insurance. Unfortunately, this strategy costs employer and employee a lot of money. The reason: taxes. When employees buy insurance on their own, they pay with after-tax dollars. It makes much more sense to set up a company group health insurance plan than pay a salary bonus so employees can buy insurance. Here’s an example to show you how this is true:
Assumption:
Cost of health insurance in California for single employee under age 30: $100/month
Scenario 1: Employer Pays Salary Bonus for Health Insurance
| DESCRIPTION | COST |
|---|---|
| Employee Bonus to Pay Health Ins. | $131.00 |
| Pays: Federal Income Tax @ 13% | $17.03 |
| State Income Tax @ 2% | $2.62 |
| State Disability Ins. @ 0.5% | $0.66 |
| Social Security @ 6.2% | $8.12 |
| Medicare @ 1.45% | $1.90 |
| Total Extra Paid | $30.33 |
| Net Pay to Employee | $100.67 |
| Employer Bonus to Pay Health Ins. | $131.00 |
| Pays: Worker’s Comp. @ 2.0% | $2.62 |
| SUI @ 2.5% | $3.28 |
| State ETT & FUTA @ 0.2% | $0.26 |
| Social Security @ 6.2% | $8.12 |
| Medicare @ 1.45% | $1.90 |
| Total Extra Paid | $16.18 |
| Net Cost to Employer | $147.18 |
Scenario 2: Employer Pays for Health Insurance
| DESCRIPTION | COST |
|---|---|
| Employer: Payment for Health Insurance | $100.00 |
| Pays: Worker’s Comp. @ 2.0% | $ 0 |
| SUI @ 2.5% | $ 0 |
| State ETT & FUTA @ 0.2% | $ 0 |
| Social Security @ 6.2% | $ 0 |
| Medicare @ 1.45% | $ 0 |
| Total Extra Paid | $ 0 |
| Net Benefit to the Employee: Full Health Insurance Plan | |
| Employee: Cost of Health Insurance | $100.00 |
| Pays: Federal Income Tax @ 13% | $ 0 |
| State Income Tax @ 2% | $ 0 |
| State Disability Ins. @ 0.5% | $ 0 |
| Social Security @ 6.2% | $ 0 |
| Medicare @ 1.45% | $ 0 |
| Total Extra Paid | $ 0 |
| Net Benefit to the Employee: Full Health Insurance Plan | |