Good news: if you’re a small business owner who provides health care coverage to your employees, you may be eligible to receive significant tax credits, depending on a number of factors. While the Affordable Care Act doesn’t require small businesses to provide health insurance, it does offer incentives for eligible enterprises that choose to provide coverage to their employees for the first time or to maintain their existing coverage.
The credit was established to help offset the costs small businesses and tax-exempt organizations incur when providing health insurance for their employees. In order to qualify, you must meet certain criteria. Here’s what you need to know to take advantage of employer health care tax credits.
If you have fewer than 25 full-time equivalent employees —generally, those who work 30 or more hours per week — making an average of approximately $50,000 a year or less, you may qualify for employer health care tax credits. But before you begin planning what you’ll do with this windfall, there are a few restrictions to keep in mind:
- You must offer coverage through the Small Business Health Options Program (SHOP) Marketplace. Visit the small business employers’ page, select your state, and continue via the “Apply Now” button.
- You must pay at least 50% of your full-time employees' premium costs.
- You don’t need to offer coverage to your part-time employees—those working fewer than 30 hours per week—or to dependents to qualify for the tax credit.
- Seasonal employees are not considered in the full-time employee and wage calculation unless they’ve worked for your business for more than 120 days during the tax year.
To find out if you qualify to receive this credit, use the IRS’ Small Business Health Care Tax Credit estimator. This tool will help you determine if you meet the basic requirements, and it approximates the amount of the credit for which you may qualify. You can then use the estimate for tax planning purposes and to help you decide if the potential credit is worth claiming.
How Much Is the Employer Health Insurance Credit?
The tax credit may be worth up to 50% of your contribution toward your employees' premium costs. The smaller the business, the bigger the credit. For example, the tax credit is highest for companies with fewer than 10 employees who are paid an average of $25,000 or less.
Here’s one scenario offered by the IRS:
- Number of employees: 10
- Wages: $250,000 total, or $25,000 per employee
- Employer contribution to employee premiums: $70,000
- Tax credit amount: $35,000 (50% of employer's contribution)
Claiming Your Tax Credit
Once you’ve determined you qualify for the credit, your tax professional and the IRS can help you navigate filing your claim to avoid any potential errors. IRS guidelines are as follows:
A Small Business (not a tax-exempt employer) can claim the credit on its annual income tax return, with an attached Form 8941, Credit for Small Employer Health Insurance Premiums, showing the amount as part of the general business credit on your return.
A Tax-Exempt Organization can include the amount on Form 990-T, Exempt Organization Business Income Tax Return. You must file Form 990-T to claim the credit, even if you don't ordinarily do so.
An employer may claim the credit for no more than two-consecutive taxable years, beginning with the first taxable year during or after 2014 in which the eligible small employer attaches a Form 8941, (or in the case of a tax-exempt eligible small employer, attaches a Form 8941 to the Form 990-T) to its income tax return.
Eligible small employers can still claim a business expense deduction for the remainder of their premium contributions.
Even if you’re a small business employer who didn’t owe tax during the year, you may be able to carry the credit backward or forward to other tax years. And if you are a tax-exempt employer, you may be eligible for a refundable credit. Consult your tax professional if you fall into either of these scenarios.
Also note that this is a federal tax credit. Your state may offer additional health care tax credits available to small employers as well. Again, check with your tax professional to see if you may be eligible. To find out more about the small business health care tax credit, visit the IRS Business Help Line website or call 1-800-829-4933.
While it might take a bit of research to determine eligibility, small business owners should take the time to see if they qualify for this health care coverage credit.
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