Health Care Tax Credit for Small Employers
The Affordable Care Act (ACA) created a tax credit for certain small employers that provide health insurance coverage to their employees. In order to be eligible for the health care tax credit, an employer must:
- Have fewer than 25 full-time equivalent employees (FTEs);
- Pay average annual wages of less than $50,000 per FTE; and
- Pay at least half of employee health insurance premiums (based on single coverage).
This Legislative Brief provides an overview of the health care tax credit for small employers.
Impact of Credit on Small Employers
For tax years 2010 through 2013, the maximum health care tax credit is 35 percent of premiums for small business employers and 25 percent of premiums for small tax-exempt employers. An enhanced version of the credit will be effective in 2014. In general, as of 2014, the maximum credit will increase to 50 percent for small business employers and 35 percent for small tax-exempt employers. The credit is gradually phased out for small employers with more than 10 FTEs and average annual wages in excess of $25,000.
As an example, if you are a small employer that pays $50,000 a year toward workers’ health care premiums and you qualify for a 15 percent credit, you can save $7,500 by using the health care tax credit. If you save $7,500 a year from tax year 2010 through 2013, you will have a total savings of $30,000. If, in 2014, you qualify for a slightly larger credit, (for example, 20 percent) your savings would go from $7,500 a year to $12,000 a year.
Small business employers that did not owe tax during the year can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit.
The credit is refundable for small tax-exempt employers. This means that, even if a tax-exempt employer does not have any taxable income, it may be eligible to receive the credit as a refund so long as it does not exceed the employer’s income tax withholding and Medicare tax liability.
Rules for Claiming Credit
To be eligible for the health care tax credit, an employer must cover at least 50 percent of the cost of single (not family) health insurance coverage for its employees. An employer must also have fewer than 25 FTEs and pay average wages of less than $50,000 per year.
Under the rules for counting FTEs, two half-time workers count as one full-time employee. For example, 20 half-time employees are equivalent to 10 full-time workers. That makes the number of FTEs 10 not 20.
Average annual wages are calculated by adding up the total wages paid by the employer during the tax year, and dividing that amount by the number of FTEs for the year. For example, if you are a small employer that has 10 FTEs and paid total wages of $200,000 during 2012, the average annual wage would be $20,000 ($200,000 divided by 10).
Starting in 2014, to take advantage of the credit, small employers must buy coverage through one of the Exchange’s small business health insurance marketplaces (or SHOPs). The credit can be claimed for any two consecutive taxable years beginning in 2014 (or beginning in a later year) through the SHOP.
Employers must use IRS Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. If you are a small business, include the amount as part of the general business credit on your income tax return. If you are a tax-exempt organization, include the amount on IRS Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you do not ordinarily file this form.
For more information on the health care tax credit, including detailed rules for eligibility and calculating and claiming the credit, please contact your Business Solutions representative.
Source: Internal Revenue Service