How Does the Small Business Health Care Tax Credit Work?

small-business-health-care-tax-credit-(2)Are you taking advantage of the Small Business Health Care Tax Credit?  This tax credit was first instituted in 2010 and set to continue until 2013.  A new, more advantageous, version of the credit will be available in 2014.

This credit is aimed at small businesses, as it allows business owners to offset a percentage of the cost of providing health care coverage to their employees.

Which Businesses are Eligible for the Tax Credit?

Businesses that that employ 25 or fewer workers, and have average wages under $50,000 per year are eligible to claim this credit.  The credit was designed as an incentive for companies to start offering health insurance coverage for their employees for the first time or to enable them to maintain existing coverage. 

The maximum tax credit is 35% (50% after 2014.) The tax credit can also be carried back or forward to offset prior & future year taxes. You can use Form 8941 to claim it.

Health Care Tax Credit Requirements

As always with the IRS, the calculation is complicated and has some caps & other limits. But basically, you must pay at least half the cost of single coverage for your workers and plan must be a “qualified” plan (e.g., an HMO or other health insurance plan).

Employers with fewer than 25 employees and average wages of $50,000 and under are eligible. The credit is on a sliding scale, so employers that have 10 or fewer employees, or less than $25,000 in average wages, will receive the maximum 35% credit.

There are caps on how high premiums can be, based on averages in your state for similar plans. Business owners & key employees owning 5% or more of the business, generally don’t qualify for the credit.

How Does the Tax Credit Work?

Business employers can use the credit to offset federal income tax.  And you can even carry the credit back or forward, as long as you did not owe tax.

Some small businesses can claim both the credit and a business deduction for health insurance premiums. 

You have to calculate Full Time Equivalents (FTEs) using the IRS’s formula to determine if you qualify. (Seasonal worker don’t count unless they work 120 hours or more per year.) Then you use that figure to calculate average wages. There’s a step by step guide from the IRS on its website.

Don’t leave this money on the table if you are eligible. Check out the facts on the IRS site or with your accountant.

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