What You Need to Know about the Small Business Health Care Tax Credit

For tax years 2010 to 2013, the maximum credit is 35% of medical premiums paid for small business employers and 25% of medical premiums paid for small tax-exempt employers, such as charities.

For tax years beginning in 2014 or later, there are changes to the credit:

• The maximum credit increases to 50% of medical premiums paid for small business employers and 35% of medical premiums paid for small tax-exempt employers. 
• To be eligible for the credit, a small employer must pay medical premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace or qualify for an exception to this requirement.
• This credit is available to eligible employers for two consecutive taxable years.

Here’s what this means for you: If you pay $50,000 a year toward health care premiums for employees — and if you qualify for a 15% credit, you save… $7,500. If you save $7,500 a year from tax year 2010 through 2013, that’s total savings of $30,000. If, in 2014, you qualify for a slightly larger credit, say 20%, your savings go from $7,500 a year to $10,000 a year.

Even if you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments is more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.

There is good news for small tax-exempt employers too. The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability. Refund payments issued to small tax-exempt employers claiming the refundable portion of credit are subject to sequestration. For more information on sequestration, click here. 

And finally, there may still be time to file an amended return to benefit from the credit this year. Generally, a claim for refund must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid.

Can you claim the credit?

Now that you know how the credit can make a difference for your business, let’s determine if you can claim it.

To be eligible for the credit,  you must:

• cover at least 50% of the cost of employee-only (not family or dependent) health care coverage for each of your employees
• have fewer than 25 full-time equivalent employees (FTEs)
• have average wages of less than $50,000 (as adjusted for inflation beginning in 2014) per year
• purchase group medical insurance through the SHOP Marketplace (or qualify for an exception to this requirement) to be eligible for the credit for tax years 2014 and beyond.

How do you claim the credit?

You must use IRS Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. For detailed information on filling out this form, see the Instructions for Form 8941.

If you are a small business, include the amount as part of the general business credit on your income tax return.

If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don’t ordinarily do so.
 

Changes Coming for Small Business Health Care Tax Credit

For tax years 2010 – 2013, eligible small employers are entitled to a 35% tax credit for health insurance premiums they pay for employees. Tax-exempt entities are eligible for a 25% credit.

To qualify for the credit, an employer must:

• Have fewer than 25 full-time equivalent (FTE) employees for the tax year

   

• Pay average annual wages of less than $50,000 per FTE

   

• Pay no less than 50% of the premium for qualifying employee health insurance

   

Employers with less than 10 FTEs and average annual wages of $25,000 or less are eligible for the full credit. There is a phase-out of the credit for employers that have between 10 and 25 FTEs or average annual wages between $25,000 and $50,000.

All employers calculate the credit using IRS Form 8941, Credit for Small Employer Health Insurance Premiums. Taxable employers claim the credit on their federal tax return and can apply the credit to both regular and alternative minimum tax. Tax-exempt employers claim the credit by filing Form 990-T, Exempt Organization Business Income Tax Return, and can receive a refundable credit up to the amount of the employer’s payroll taxes.

Changes in 2014

In 2014, the credit will continue to be available, but with significant modifications. Employers will only be eligible for the credit if they purchase health insurance through the new Small Business Health Options Program (SHOP). The SHOP is one component of the internet-based health insurance marketplace, also known as an exchange, which launches on Oct. 1, 2013.

Other upcoming changes include:

• The maximum credit increases to 50% (or 35% for tax-exempt organizations)

   

• The $50,000 and $25,000 average annual dollar amounts will be indexed for inflation

   

• The credit is based on the lesser of the employer’s actual premium payments or the average premiums in the small group market in its employees’ rating area

   

• The credit is only available for two consecutive tax years after 2013, but it can be carried back or carried forward

Reminder: How to Claim Small Business Health Care Tax Credit

One of the ways in which the Affordable Care Act helps bring down costs for small employers is through the tax credit available to eligible small businesses that provide health care insurance to their employees. The credit significantly offsets the cost of providing insurance and with the 2012 corporate tax filing deadline rapidly approaching (March 15th), you don’t want to let this valuable tax break pass you by.

What is the Small Business Health Care Tax Credit?

Currently the maximum tax credit is 35% for small businesses employers and 25% for small tax-exempt employers (i.e. charities and non-profits). This percentage applies to tax years 2010 through 2013. Even better, in 2014 the credit will increase to 50% for eligible small business employers and up to 35% for tax-exempt employers through the new Small Business Health Options Program (SHOP) Marketplace (also known as the Exchange).

The credit can also be carried back or forward to other tax years. Since the amount of the health insurance premium payments are more than the total credit, eligible businesses can still claim a business expense deduction for the premiums in excess of the credit.  That equals out to both a credit and a deduction for employee premium payments.

Who Qualifies for the Small Business Health Care Tax Credit?

To qualify for the credit, you must meet the following criteria:

• You must cover at least 50% of the cost of single (not family) health care coverage for each of your employees

   

• You must have fewer than 25 full time equivalent employees (2 half-time workers count as one full timer)

   

• Those employees must have average wages of less than $50,000 a year

   

To help determine whether you qualify for the credit, follow this step by step guide from the IRS.

How to Claim the Credit

You must use the IRS Form 8941 to calculate the credit.. Then include the credit amount as part of the general business credit on your income tax return. If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T. You must file the Form 990-T in order to claim the credit even if you do not ordinarily do so. Remember, you may be able to carry the credit back or forward. Be sure to talk to your tax advisor for more assistance.