As a result of the Affordable Care Act (ACA), also known as Obamacare, small businesses have an opportunity to receive tax credit assistance on their insurance premiums. For tax years 2010 through 2013, the maximum credit is 35 percent of premiums paid for small business employers and 25 percent of premiums paid for small tax-exempt employers such as charities. Beginning in 2014, this tax credit will be up to 50% of qualified health insurance premiums paid by small businesses and 35% of the qualified premiums paid by small tax-exempt businesses. The credit will be available for two consecutive taxable years, and can be transferred forward or back if there is no taxable income in a year.
How to Qualify for the Small Business Tax Credit
To be eligible, a business must cover at least 50% of the cost of single (not family) health care coverage for each of its employees. You must have less than 25 full time equivalent (FTE) employees, and they must average less than $50,000 in income per year.
Beginning in 2014, a business must purchase their health insurance through the Small Business Health Options Program (SHOP) marketplace in order to be eligible for the tax credit. Detailed questions and answers about the SHOP marketplace can be found on the Healthcare.gov Key Facts document.
To determine the number of FTE employees, determine how many full-time (40 hour week) staff you have. If two employees work half-time, they count as one FTE. If four part-time employees each work 10 hours a week, the four of them together are one FTE. By adding up the hours of all of your employees, you can determine your total FTE count.
Once you have the number of FTE employees, you can determine average wage. Simply take the annual salary of all employees (not ownership) and divide by the number of FTE’s. This gives you the average salary needed for the small business tax credit calculation.
Finally, keep in mind that the tax credit is offered on a sliding scale. Smaller businesses – those with fewer employees and a lower average wage – get a higher credit, while those on the higher end of the scale will receive a lower credit.
Claiming the Small Business Tax Credit
The IRS requires small businesses to use Form 8941, the Credit for Small Employer Health Insurance Premiums form, to calculate the tax credit. Small businesses should include the amount of the tax credit with the rest of their general business credit on their income tax form.
For tax-exempt employers, the amount of the tax credit should be included on line 44f of Form 990-T, the Exempt Organization Business Income Tax Return.
In either case, the non-credited amount of paid health insurance premiums can still be deducted against the earned income of the business.
Businesses with less than 50 employees are not subject to a penalty for not providing health insurance, but the SHOP marketplace and the Small Business Tax Credit make it an important option to consider. By calculating the number of FTE’s you have and the average wage, you can find out if you would be eligible for a credit to help make providing insurance more affordable. This can help you take care of your employees by providing needed benefits without causing concern for your business’ success.
This article is intended for general information and should not be taken as official tax or legal advice. Please see an accountant for specific questions about your small business taxes.