Small Business Health Care Tax Credit: Do You Qualify?

by Liz Magill on April 13, 2011
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With health care costs soaring, small businesses across the country are struggling to provide health insurance coverage for their employees. In 2009, only 46 percent of small businesses with fewer than 10 employees offered health insurance to their workers, which is down from 57 percent in 2000. Add that to the predicament that small businesses typically pay over 18 percent more in health care costs than large corporations, it’s easy to see why small businesses are caught in the middle.

Fortunately, the government cares about small businesses — just like we do. In an attempt to encourage more small businesses and small tax-exempt organizations to provide health insurance coverage for their employees, President Obama signed into law the Small Business Health Care Tax Credit as one of the provisions of the Affordable Care Act.

“The credit for small employers from 2010-2013 can be as much as 35 percent of premiums paid and 50 percent in 2014, ” says Kevin Bickerstaff, Tax Specialist at Sansiveri, Kimball & Co. What’s more, the credit limit from 2010-2013 is 25 percent and 35 percent beginning in 2014 for tax-exempt small employers.

The IRS was nice enough to send out postcards in April 2010 to millions of small business owners notifying them of this new small business health care credit, and urging them to check their eligibility. But in case you didn’t receive the postcard or check your eligibility then, here’s the lowdown of the three main qualification criteria:

  • Employees – To qualify for the credit, your firm must have less than 25 full-time employees. (Having fewer than 50 “half-time” employees also qualifies).
  • Average annual wages paid – A qualifying business must pay average annual wages below $50,000.
  • Insurance premiums coverage – A qualifying employer must pay at least half of the health care cost at the employee-only (single) coverage rate.

Here’s an example:

  • Business: Restaurant with 40 part-time workers, the equivalent of 20 full-time workers.
  • Employees: 20 full-time equivalent workers (40 part-time employees)
  • Wages: $500,000 or $25,000 per full-time worker ($12,500 per part-time employee)
  • Employee Health Care Premiums Paid: $200,000
    • 2010-2013 Estimated Credit: $23,333
    • 2014 Estimated Credit: $33,333

The IRS provides a handy three-step fact sheet to determine if your for-profit or tax-exempt business qualifies for the Small Business Health Care Tax Credit.

Want to calculate your estimated tax credit, for this year and the next four tax years? The Small Business Majority also has a useful calculator to give you a rough estimate of what your small business health care tax credit figure will likely be.

Both for-profit small businesses tax-exempt organizations will use Form 8941: Credit for Small Employer Health Insurance Premiums to calculate the credit. While small businesses will claim the credit on the general business credit section of its income tax return, tax-exempt organizations will use Form 990-T to claim the credit.

For more information about the new Small Business Health Care Tax Credit, check out this YouTube video by an IRS employee.

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