Small Business Tax Credit
The new health care reform law allows some small businesses to receive a credit for providing health insurance to their employees. This tax credit involves two phases of implementation: one in 2010, prior to the establishment of the Health Care Exchange, and one in 2014, following the establishment of the Health Care Exchange. A tax credit calculator is available HERE.
Who is eligible for the tax credit?
Between 2010 and 2013, small employers can get a 35 percent tax credit for the employer's contribution cost if they meet the following criteria:
- Have 10 or fewer employees,
- Employees earn less than $25,000 on average
- Employers are paying for 50 percent of the premium cost.
Tax-exempt employers are eligible for up to a 25 percent tax credit.
Employers can qualify for a smaller tax credit if they have less than 25 employees with an average wage of less than $50,000. The credit phases-out as firm size and average wage increases. Once the employer has either 25 employees or average wages of $50,000, there is no credit allowed. In addition, there is no credit allowed for health benefits provided to any employee who earns more than $80,000 a year.
This tax credit is available between 2010 and 2013 and applies to all applicable employers, regardless of whether or not they offered benefits in the past. Starting in 2014, the credit increases and can only be used for two additional years.
The tax credit is allowed as a part of the General Business Credit against taxable income and against the Alternative Minimum Tax for for-profit organizations and payroll taxes for tax-exempt organizations. An illustration of this tax credit and its eligibility requirements is listed below.
| FTE Employees |
Maximum Average Pay |
Max. Credit Allowed 2010-2013 |
Max. Credit Allowed 2014- |
| 1-10 |
$25,000 |
35% (25% non-profit) |
50% (35% non-profit) |
| 11-24 |
$49,999 |
0-35% |
0-50% |
| 25+ or |
$50,000 |
0% |
0% |
What are the "Premium Costs Paid by the Employer"?
Employers must pay for 50 percent of the total premium costs for their employees based upon the "Single" rate. Only premiums paid by the employer under an arrangement meeting certain requirements (a “qualifying arrangement”) are counted in calculating the credit. If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement (with employees paying the rest), the amount of premiums counted in calculating the credit is only the portion paid by the employer. For example, if an employer pays 80 percent of the premiums for employees’ coverage (with employees paying the other 20 percent), the 80 percent premium amount paid by the employer counts in calculating the credit. For purposes of the credit (including the 50-percent requirement), any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer.
Please see the IRS FAQ for further information in calculating this total.
What is an Employee or "FTE"?
A full-time "equivalent" (FTE) employee is one who works 2,080 hours per year. When calculating average pay, only calculate an employee's wages up to 2,080 hours of work. Although an employee may have worked more than 2,080 hours per year, time in excess of 2,080 cannot be counted when making a determination whether an employee is full-time. A part-time employee counts proportionally against this limit. For example, an employee working 1,040 hours only counts as 1/2 FTE. A spreadsheet to help calculate FTE is available HERE.
Note: Five-percent owners under the section 416 top-heavy plan rules and 2-percent S corporation shareholders are not included in the definition of employee, but leased employees are counted. (I.e. if you operate as a partnership, each partner counts as an employee.) Seasonal workers must work for more than 120 days in order to have their hours included in the FTE calculation.
How do I calculate "Average Employee Wage"?
The amount of average annual wages is determined by first dividing the total wages paid by the employer to employees during the employer’s tax year by the number of the employer’s FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000). For this purpose, wages means wages as defined for FICA purposes for employees who are included in the calculation of the FTE.
How do you claim the credit?
The credit is claimed on the employer’s annual income tax return. The credit offsets only an employer’s actual income tax liability (or alternative minimum tax liability) for the year. However, as a general business credit, an unused credit amount can generally be carried back one year and carried forward 20 years. Because an unused credit amount cannot be carried back to a year before the effective date of the credit, though, an unused credit amount for 2010 can only be carried forward
For a tax-exempt employer, the credit is claimed against payroll taxes. However, the amount of the credit cannot exceed the total amount of income and Medicare (i.e., Hospital Insurance) tax the employer is required to withhold from employees’ wages for the year and the employer share of Medicare tax on employees’ wages.
What happens beyond 2014?
Beyond 2014, eligible small businesses that purchase coverage through the state Health Insurance Exchange are provided a tax credit of up to 50 percent (35 percent for tax-exempt) of the employer's contribution toward the employee's health insurance premium if the employer contributes at least 50 percent of the total premium cost. This credit is also available for only two years.
Rules on calculating FTE, average pay, and who counts as an employee are the same as in the earlier period of 2010-2013.
Additional Information
The IRS has created FAQ for the Small Business Tax Credit Available HERE.
Additional Questions?
This provision may change in the future. Please be sure to discuss this with your accountant or tax professional.
If you have additional questions or suggestions on further information, please email COSE Advocacy.