Small Business Health Insurance

This credit is available to for-profit and nonprofit employers with fewer than 25 full-time equivalent employees with average annual wages of less than $50,000.

Under the Patient Protection and Affordable Care Act, certain small employers will be eligible for a tax credit, provided they contribute a uniform percentage of at least 50% toward their employees’ health insurance. For tax-exempt (nonprofit) organizations, the credit will be in the form of a reduction in income and Medicare tax the employer is required to withhold from employees’ wages and the employer share of Medicare tax on employees’ wages. This article will address the tax credit available for-profit employers.

For qualifying employers, the credit will be in the form of a general business credit. This credit is not refundable, but is limited to the for-profit employer’s actual tax liability. Therefore, if the for-profit employer’s company paid no taxes because it had no taxable income, then the health insurance credit could not be used immediately because there is no tax liability. However, as a general business credit, an unused credit amount can generally be carried forward up to 20 years.

Determine the total number of your employees not counting owners or family members:

Employees include persons who work at least 40 hours per week plus full-time equivalent of part-time employees. Full-time equivalents are figured by dividing the total annual hours of part-time employees by 2080. If the total number of employees is fewer than 25, then:

Calculate the average annual wages of employees not counting owners or family members:

Divide the total annual wages paid to employees by the number of employees to figure the average employee wages. If the average wages are less than $50,000 then:

If you pay at least half of the insurance premiums for your employees at the single (employee-only) coverage rate not counting owners or family members:

The premiums must be paid under a qualifying arrangement – an arrangement that requires you to pay a uniform percentage of the premium cost for each enrolled employee and the premiums paid are not more than premiums benchmarked on a state-by-state basis then:

You may qualify for the Small Business Health Care Tax Credit!

In each of the four years 2010 through 2013, the maximum credit is 35% of a qualified for-profit employer’s contribution to health insurance. For example: if an employer paid for 60% of premiums, the maximum small business tax credit through 2013 will be equivalent to 35% of the employer contribution. If the employer paid an average total premium of $6,000, per employee, and the employer’s contribution was $3,600 (60%) per FTE (full-time equivalent), the maximum tax credit would be $1,260 per FTE (35% of $3,600).

Note that the deduction for health insurance costs must be reduced by the amount of the credit, reducing the tax benefit.

To receive full credit:

The employer must have 10 or fewer full-time equivalent employees and have average taxable wages of $25,000 or less.

To receive partial credit:

The credit is phased out as the number of full-time equivalents increase from 10 to 25 and average employee compensation increases from $25,000 to $50,000.

The credit is taken on IRS Form 8941. Once again, the Internal Revenue Service requirements are complex and lengthy. This form is particularly not user friendly. Nothing is simple in the world of government.

About the Author

Deborah Petrone is a CPA, master of taxation, the manager of specialized tax services and principal for Schlabig. Her responsibilities include finding innovative ways to help business clients as they grow, like using QuickBooks, entity specification and tax planning; preparing fiduciary and estate tax returns; and facilitation of estate and wealth planning. (More about Debbie)

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