The Affordable Care Act created a new tax credit that eligible small businesses may use to make it more affordable to provide health insurance to their employees. A small business is generally one that employs 2 to up to 50 employees. In some states, a small business also includes someone who is self-employed with no employees.
A small business that employs up to 25 employees, pays average annual wages below $50,000, and provides health insurance, may qualify for a small business tax credit of up to 35% (up to 25% for non-profits) to offset the cost of the cost of providing health insurance. Starting in 2014, the small business tax credit goes up to 50% (up to 35% for non-profits).
To be eligible to claim the credit, the small employer must cover at least 50 percent of the cost of single (not family) health care coverage for each of its employees. The employer must also have fewer than 25 full-time equivalent employees (FTEs) with average wages of less than $50,000 a year.
To determine the number of FTEs, the employer has to aggregate part time employees to determine how many full-time employees the workers would equal. For example, two employees who work half-time would equal one full-time employee. To determine average wages, the employer aggregates total wages and divides it by the number of FTEs.
The amount of the credit an employer can receive works on a sliding scale. The smaller the business or charity, the bigger the credit.
Claiming the Credit
Employers use Form 894, Credit for Small Employer Health Insurance Premiums, to calculate the credit.
Small businesses include the credit amount as part of the general business credit on the employer's income tax return.
Tax-exempt organizations include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. A tax-exempt employer must file the Form 990-T in order to claim the credit, even if the employer does not ordinarily do so.
Savings Example
The small business tax credit can result in large tax savings. For example, if a small business that qualifies for a 15% tax credit pays $50,000 a year toward workers’ health care premiums, the business saves $7,500 for the year. This savings across several years can add up.
Even employers who do not owe tax during the year can take advantage of the credit. The credit can be carried backward or forward to other tax years. Moreover, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can also still claim a business expense deduction for the premiums in excess of the credit, resulting in both a tax credit and a tax deduction.
The IRS website provides useful information about claiming the credit and provides a step-by-step guide for determining eligibility for the credit. See www.irs.gov.
