This credit is aimed at small businesses and it allows business owners to offset a percentage of the cost of providing employee health care coverage purchased through the SHOP marketplace for their employees by using tax credits.
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 50%. The tax credit can also be carried back or forward to offset prior & future year taxes.
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 (adjusted for inflation each year) and under are eligible. The credit is on a sliding scale, so the credit available will vary by the situation.
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 calculator on the IRS 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.