Businesses with fewer than 25 full-time equivalent employees and with average wages of $50,000/year or less (to be adjusted for inflation beginning in 2014) may qualify for employer health care tax credit. Businesses must pay a minimum of 50% of the full-time employees’ premium costs and are not required to provide health insurance coverage to part-time employees or dependents.
Full-time employees are defined as individuals who, on average, are working 30 hours or more per week or 2 part-time workers. For example, 20 part-time employees are equivalent to 10 full-time employees.
Additionally, for tax years beginning in 2014, only businesses which obtain health insurance coverage through the Small Business Health Options Program (SHOP) Marketplace are eligible for the Health Care Tax Credit. The SHOP Marketplace enables small businesses to provide qualified health plans to their employees. For 2014, the SHOP Marketplace is open to employers with 50 or fewer full-time equivalent employees.
For tax years 2010 – 2013, the maximum credit was 35% of premiums paid for small business employers and 25% of premiums paid for small tax-exempt employers such as charities. However, for tax years beginning in 2014 or later, the tax credit has been increased to up to 50% of the small business contribution toward employees’ premium costs (up to 35% for small, tax-exempt employers). The tax credit amount is determined on a sliding scale. The smaller the business, the larger the credit. The tax credit is highest for companies with fewer than 10 employees who are paid an average of $25,000 or less. The tax credit is available to eligible employers for 2 consecutive taxable years.
An example of the benefits of this tax credit for small businesses is a small business, which pays $50,000 a year toward workers’ health care premiums, would qualify for a 15% credit, a savings of $7,500. A savings of $7,500 per year from tax year 2010 through 2013 equates to a total savings of $30,000. If, in 2014, that same small business qualifies for a slightly larger credit (e.g., 20%), the small business’ savings increase from $7,500 per year to $10,000 per year. For small businesses that do not owe tax during a given year in which businesses take the credit, the small business may carry the credit back or forward to other tax years.
Furthermore, if the amount of the health insurance premium payments is more than the total credit, eligible small businesses can still claim a business deduction for the premiums in excess of the credit. In other words, these qualifying businesses can claim both a credit and a deduction for employee premium payments. For small tax-exempt employers, the credit is refundable given that the tax credit claim does not exceed the tax-exempt employer’s income tax withholding and Medicare tax liability.
To claim the credit, use IRS Form 8941, Credit for Small Employer Health Insurance Premiums, and include the amount as part of the general business credit on the income tax return. Tax-exempt organizations should include the amount on line 44F of the Form 990-T, Exempt Organization Business Income Tax Return. The Form 990-T must be filed in order to claim the credit.