Do you qualify for the small business health care tax credit? In March 2010, the Patient Protection and Affordable Care Act was signed into law. The law includes a tax credit that can return up to 35 percent of the health care premiums your business paid. The credit is intended to encourage the smallest companies, ones with the lowest-paid employees, to start providing health care coverage. Tax-exempt organizations qualify, but special rules apply to calculating the credit, which can return 25 percent of premiums to nonprofits.
There are two qualifying situations having to do with payroll: number of employees (the equivalent of no more than 25 full-time employees) and an average wage under $50,000. The optimal credit goes to companies with fewer than 10 employees (or the equivalent of 10 full-timers) earning less than $25,000 on average. The business owner and family members of the owner generally do not count as employees. Seasonal workers also don’t count in determining the number of full-time-equivalent employees, unless they are on your books for more than 120 days during the tax year.
A final qualifying situation applies to the premiums you pay for health care. The law requires that premiums must be uniformly paid for all employees enrolled in health care coverage, and the employer-paid portion must be not less than 50 percent. So, if the business pays 50 percent of the premiums for employees opting for single coverage and 50 percent of the premiums for employees opting for family coverage, the business would qualify. A uniform percentage is key. However, in 2010, different rules apply.
If an employer pays at least half of the premium for each employee at the single coverage rate, even if some employees have employee-plus-one or family coverage, the company still qualifies for the credit. So the uniformity rule is softened in this year of transition.
If you have a relatively expensive health care plan, you will not get the full allowable credit. The statewide average health care premium in the small-group market is used as a guide. So if you pay 50 percent of the premium for employees’ single coverage, and the average premium for the small-group market in your state is $5,000 for single coverage, the credit would be capped at $2,500 (50 percent of $5,000). If the number of full-time-equivalent employees (FTEs) exceeds 10, or the average wages exceed $25,000, the amount of the credit is reduced by a fractional amount. To see how these figures are calculated, visit the IRS website mentioned below.
An employer claims the credit on her income tax form, and the credit can be reflected when calculating the amount to pay in estimated taxes. An employer may not reduce employment tax payments—withheld income tax, Social Security tax and Medicare tax—in anticipation of the credit.
For more information, visit http://www.irs.gov/newsroom/article/0,,id=220839,00.html.