The Affordable Care Act provides a Small Business Health Tax Credit to a number of small employers that provide health care coverage to their employees. This provision is effective with tax years beginning in 2010. The following questions and answers based on guidance from the IRS provide some basic information on the small business tax credit as it applies for 2010-2013. An enhanced version of the credit will be effective beginning in 2014. You can read the regulations and the complete IRS guidance at: Small Business Health Care Tax Credit for Small Employers.
Which employers are eligible for the small business health care tax credit?
If you are a small employer that provides health care coverage to your employees and meet certain requirements you may qualify for a federal income tax credit for health insurance premiums you pay for specific employees. To be a qualified employer:
- You must have fewer than 25 full-time equivalent employees (“FTEs”) for the tax year
- The average annual wages of your employees for the year must be less than $50,000 per FTE
- You must pay the premiums under a “qualifying arrangement”
What is a qualifying arrangement?
Only premiums that you pay that meet certain requirements are counted in calculating the credit. Under a qualifying arrangement, you pay premiums for each of your employees enrolled in the health care plan you offer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage.
For years prior to 2014, only premiums that you pay to a health insurance issuer, such as an insurance company or HMO, for health care coverage are counted for purposes of the credit.
If you pay only a portion of the premiums for the coverage you provide to your employees, and your employees pay the rest, the amount of the premium you can count in calculating the credit is only the portion that you pay.
For example, if you pay 80 percent of the premiums for your employees’ coverage, with your workers paying the other 20 percent, the 80 percent premium amount you pay counts in calculating the credit.
Can a tax-exempt organization be a qualified employer?
Yes. The same definition of qualified employer applies to a 501(c) tax-exempt organization.
What is the maximum credit for a qualified employer?
For tax years beginning in 2010 through 2013, the maximum credit is 35 percent of your premium expenses that count towards the credit.
What is the maximum credit for a tax-exempt qualified employer?
For tax years beginning in 2010 through 2013, the maximum credit for a tax-exempt qualified employer is 25 percent of the employer’s premium expenses that count towards the credit.
Can premiums paid by the employer in 2010, but before the Affordable Care Act was enacted, be counted in calculating the credit?
Yes. In computing the credit for a tax year beginning in 2010, you can count all premiums for that tax year.
Can an employer with 25 or more employees qualify for the credit if some of its employees are part-time?
Yes. The limitation on the number of employees is based on full-time equivalents (FTEs). If you employ 25 or more workers you could qualify for the tax credit if some of your employees work part-time. For example, if you have a workforce of 46 half-time employees you may qualify for the credit because you have 23 FTEs.
Are seasonal workers counted in determining the number of FTEs and the amount of average annual wages?
Generally, no. Your seasonal workers are not counted in determining either your company’s FTEs or average annual wages unless the seasonal worker works for you for more than 120 days during the tax year. However, health insurance premiums that you pay on their behalf may be counted in determining the amount of your credit.
If an owner of a business also provides services to it, does the owner count as an employee?
Generally, no. if you are a sole proprietor, a partner, a shareholder owning more than two percent of an S corporation, or you own more than five percent of the business, you are not considered an employee for purposes of the tax credit. Thus, your wages or hours are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on your behalf are not counted in determining the amount of the credit.
Do my family members who work for the business count as employees?
Generally, no. Family members of any of the business owners are not considered employees for purposes of the tax credit. Their wages and hours are not counted in determining the number of FTEs or the amount of average annual wages, and premiums you pay their behalf are not counted in determining the amount of the credit.
The IRS considers a family member to be a child, a sibling or step-sibling, a parent or step-parent, a grandparent or grandchild, a niece or nephew, an aunt or uncle, or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.
How can I find out if my business qualifies?
To determine if your small business or tax exempt organization qualifies for the Small Business Health Care Tax Credit, follow the three simple steps on the IRS fact sheet: 3 Simple Steps.
Some IRS Examples of Employers Receiving the Credit
Example 1 - Auto Repair Shop
- Employees: 10
- Wages: $250,000 total, or $25,000 per worker
- Employee Health Care Costs: $70,000
- 2010 Tax Credit: $24,500 (35% credit)
- 2014 Tax Credit: $35,000 (50% credit)
Example 2: Restaurant
- Employees: 40 half-time employees (equivalent of 20 full-time workers)
- Wages: $500,000 total, or $25,000 per full-time equivalent worker
- Employee Health Care Costs: $240,000
- 2010 Tax Credit: $28,000
- 2014 Tax Credit: $40,000
Example 3: Foster Care Non-Profit
- Employees: 9
- Wages: $198,000 total, or $22,000 per worker
- Employee Health Care Costs: $72,000
- 2010 Tax Credit: $18,000 (25% credit)
- 2014 Tax Credit: $25,200 (35% credit)
How do I claim the credit?
You can claim the credit with your 2010 business income tax return that you file in 2011.
