Claim Your Small Business Health Care Tax Credit

If you’re a small employer with a health insurance plan and pay at least half of employee premiums, you probably qualify for a new health care tax credit worth thousands or even tens of thousands of dollars.  Contrary to rumors and media reports, most small businesses do in fact qualify for substantial tax credits, and SBA Administrator Karen Mills issued a letter today saying just that.

Generally, tax credits are available for small business owners who:

  • Started or continued health insurance coverage for employees in 2010
  • Contribute at least 50% of employee premiums at the single coverage rate
  • Have fewer than 25 full-time employees (part-time employees are counted proportionately)
  • Pay their employees an average of less than $50,000

The IRS has a simple three-step worksheet (at www.irs.gov/pub/irs-utl/3_simple_steps.pdf) to help determine your eligibility.

Here’s an example.  An auto repair shop with 10 employees whose earnings average $25,000 can get what amounts to a 35% “rebate” on its health insurance premiums. Based on typical costs, that would be a credit of $24,500, according to IRS estimates. Not bad. And that’s a credit – which directly lowers your tax dollar-for-dollar – not merely a deduction.

Here’s what you need to know…

Because the eligibility formula is based in part on the number of FTEs, not the number of employees, employers that have more than 25 individual workers may also qualify if some workers are part-time. For eligible businesses the credit could provide a welcome boost.  Here are the four key health care credit eligibility standards:

1)    Your business provides and pays for health coverage. To clear the first hurdle, you must cover at least half of the cost of health care coverage for your employees.

2)    Your business is small. You cannot have more than the equivalent of 25 full-time workers. Eight half-time employees count as four “full-time equivalent” (FTE) workers. Thus, an employer with fewer than 50 half-time workers can still qualify.

3)    Your wages aren’t too generous. A qualifying employer must pay average annual wages below $50,000 to get even a partial credit.  For the full credit, the average must be under $25,000.

4)    Both taxable (for-profit) and tax-exempt (non-profit) firms qualify.

The credit is worth up to 35 percent of your premium costs in 2010 (25 percent for non-profits). In 2014 that jumps to 50 percent (35 percent for non-profits).  A ruling just issued by the IRS also confirms that the credit applies to premiums you pay for dental and vision coverage.  And your business can still qualify for the federal credit even if you receive a separate state credit.

Businesses with 10 or fewer workers and average annual wages less than $25,000 will qualify for the full credit. The credit starts to phase out as you move above those limits.  Businesses with average payrolls over $50,000 will not qualify for the credit at all.

Also be aware that if your business pays only a portion of health insurance premiums, with employees paying the rest, you can only count the premiums you pay when calculating the credit.

Another example: Downtown Diner, a restaurant with 40 part-time employees (the equivalent of 20 full-time workers), pays total wages of $500,000, or an average of $25,000 per full-time equivalent worker. Health insurance premiums paid by the business this year total $240,000, and the business would qualify for a 2010 credit $28,000, after applying “phase-out” provisions.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011.

Small Business Tax Credit Calculator is a new web-based tool that computes precise (not estimates) small business health care reform tax credit calculations for filing actual small business tax returns based upon each state’s allowances and up-to-the-minute legal requirements.  As the regulations regarding the small business health care reform tax credit continue to evolve it is critical to have a calculator that updates with the changes as they occur.

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Filed Under: BizFinanceBizTaxes

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About the Author: Daniel Kehrer, Founder and Chief Content Officer of BizBest Media, is a senior-level leader in digital media, content development and online marketing with special expertise in startups, SMB, social media and generating traffic, engagement and leads. He holds an MBA from UCLA/Anderson and is a passionate entrepreneur (started 4 businesses), syndicated columnist, blogger, thought leader and author of 7 business and financial books.

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  1. Onofre Contreras says:

    just one minor note – in reviewing the IRS FAQ’s on Small Business Health care Tax Credit the language is “”the employer must have fewer than 25 full-time equivalent employees.” So “the equivalent of 25 full-time workers” makes a business ineligible. Have to squeeze in at 24.99

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