Quick answer

• Employer‑sponsored health insurance is pre‑tax because the premiums are excluded from the employee’s taxable wages under the Internal Revenue Code (IRC) §§ 106 (and § 105 for employer contributions) and are usually delivered through a Section 125 cafeteria plan.
• Individually purchased insurance (the “solo” or “self‑signed” market) is not pre‑tax. Most taxpayers can only treat those premiums as a medical expense on Schedule A, and only the amount exceeding 7.5 % of AGI is deductible.
• Self‑employed individuals have a special above‑the‑line deduction for 100 % of their health‑insurance premiums (IRC § 162(l)), but this is still an after‑tax deduction limited to net self‑employment earnings.

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1. Employer‑provided health insurance – why it’s pre‑tax

Feature	Tax treatment	Legal basis
Employer pays the premium	Entire amount is excluded from the employee’s gross income – it never appears as taxable wages on the W‑2 (Box 1).	IRC § 106 (excludes employer contributions) and § 105(b) (allows employer‑paid premiums to be excluded).
Employee’s share	Usually taken from the paycheck before federal, state, and FICA taxes are calculated (a “premium‑only” or “cafeteria” plan).	Section 125 cafeteria plan (premium‑only plan) – the employee’s contribution is a tax‑free fringe benefit.
Result	Reduces both income tax and payroll tax liability for the employee; the employer also deducts the cost as a business expense.	IRS Publication 15‑B, “Employer’s Tax Guide to Fringe Benefits.”

How it works in practice

1. The employer contracts with the insurer and pays the full premium.
2. If the employee contributes, the amount is withdrawn pre‑tax from payroll.
3. The employee’s taxable wages are reduced by the total premium, so the employee pays no federal income tax, no Social Security tax, and no Medicare tax on that portion.

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2. Individually purchased (solo) insurance – why you can’t deduct it pre‑tax

2.1 General employees (non‑self‑employed)

Premiums are paid with after‑tax dollars.

• They are not excluded from income.
• The only tax relief is the itemized medical‑expense deduction on Schedule A, subject to the 7.5 % of AGI threshold (IRC § 213).
• If total qualified medical expenses (including premiums) do not exceed that threshold, no deduction is allowed.

Example: AGI = $60,000 → 7.5 % = $4,500. If your total medical expenses (premiums + doctor visits, etc.) are $4,000, you get no deduction. Only the $500 that exceeds $4,500 would be deductible.

2.2 Self‑employed individuals (sole proprietors, partners, LLC members)

• Above‑the‑line deduction: 100 % of premiums for the taxpayer, spouse, dependents, and children under 27 can be deducted directly on Form 1040, Schedule 1, reducing AGI.
• Limitation: The deduction cannot exceed the net self‑employment earnings for the year (IRC § 162(l)).
• No effect on self‑employment tax: The deduction reduces income tax but does not reduce the SE tax base; the self‑employed person still pays SE tax on the full net earnings.

This is a deduction, not an exclusion. The taxpayer first pays tax on the full income, then the deduction lowers taxable income, which is less valuable than a pre‑tax exclusion.

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3. Policy and historical background

Reason	Explanation
WWII wage‑controls	Employers could not raise salaries, so they offered health benefits that were tax‑free to attract workers.
Encouraging group coverage	Group plans pool risk across many employees, lowering overall costs; the tax code incentivizes this by providing a full exclusion.
Administrative simplicity	Payroll systems can automatically apply the pre‑tax treatment; individual deductions would require separate filing and verification.
Revenue considerations	Allowing a full deduction for all individual premiums would erode a large share of tax revenue; the limited itemized deduction mitigates that impact.

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4. Practical take‑aways

1. If you have employer coverage – enjoy the full pre‑tax benefit; your premium never shows up as taxable income.
2. If you’re self‑employed – claim the above‑the‑line health‑insurance deduction (subject to net earnings).
3. If you’re a regular employee buying solo coverage – you can only deduct premiums as part of itemized medical expenses that exceed 7.5 % of AGI; otherwise, the premiums are not deductible.
4. Consider ACA premium tax credits – if you qualify based on income, you may receive a refundable credit that directly reduces the cost of marketplace plans (separate from deductions).

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5. Key statutory references

• IRC § 106 – Exclusion of employer‑provided health insurance.
• IRC § 105(b) – Employer contributions excluded from employee income.
• IRC § 125 – Cafeteria (premium‑only) plans allowing pre‑tax employee contributions.
• IRC § 162(l) – Self‑employed health‑insurance deduction (above‑the‑line).
• IRC § 213 – Medical‑expense itemized deduction (7.5 % AGI floor).

IRS Publications

• Pub. 15‑B: Employer’s Tax Guide to Fringe Benefits.
• Pub. 502: Medical and Dental Expenses.
• Pub. 535: Business Expenses (self‑employed deduction).

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6. Sources

• IRS – Employer‑Provided Health Insurance (Section 106)
• IRS – Medical and Dental Expenses (Pub 502)
• IRS – Self‑Employed Health Insurance Deduction (Form 1040 Schedule 1)
• Cornell Law – 26 U.S.C. § 106, § 213, § 162(l)