Eligible small employers who provide health care coverage to their employees can receive a Small Business Health Care Tax Credit from the federal government. Here is what you need to know about who qualifies and how to take advantage of the credit.
What is the Small Business Health Care Tax Credit?
Small business owners make numerous decisions about employee benefits. For example, the type of benefits offered can entice the most desirable candidates to apply for their company’s positions. The right type of benefits can also boost employee retention. An excellent employee benefit to consider is health insurance. In considering whether to offer health insurance to your employees, you should consider the impact of the the small business health care tax credit. The tax credit is limited to employers with less than 25 employees, and it operates as a sliding-scale credit based on the size of the employer. The larger the employer, the smaller the tax credit. The maximum credit is 50 percent of premiums paid (35 percent for tax-exempt employers).
Qualifying small employers can take advantage of the small business health care tax credit for two consecutive tax years. The credit can also be carried forward or back to other tax years. Any excess amount paid for health insurance premiums over the allowable credit can be claimed as a business expense.
Who qualifies for the Small Business Health Care Tax Credit?
As mentioned above, the small business health care tax credit is for small employers with fewer than 25 full-time equivalent employees (FTE). Note that the FTE concept is based on hours worked rather than the actual number of employees.
Other qualifications include:
The employer pays less than $50,000 a year per FTE in average wages.
The employer offers a qualified health plan to employees through a Small Business Health Options Program Marketplace.
The employer pays at least 50 percent of the employee’s premium cost.
What about Tax-exempt Organizations?
Tax-exempt organizations are also eligible for the small business health care tax credit. In this case, the credit is refundable to the extent that it does not exceed income tax withholdings or Medicare tax liability. Refunds to tax-exempt organizations are reduced by the current fiscal year sequestration rate. For an explanation of sequestration and how it impacts the small business health care tax credit, consult your tax advisor or accountant.
How do small businesses take advantage of the Small Business Health Care Tax Credit?
To claim the small business health care tax credit, the IRS requires Form 8941 (Credit for Small Employer Health Insurance Premiums) to be filled out and submitted. For small businesses, the amount should be included as part of the general business credit on the company’s federal tax return. The amount should be included on Form 990-T (Exempt Organization Business Income Tax Return) for tax-exempt organizations. Note: this form must be filed for a tax-exempt organization to claim the small business health care tax credit, even if the business does not typically file that form.
We are available to assist you determine your eligibility for this credit and to calculate the full amounts that you will be able to claim.