One of the principal objectives of the health reform legislation passed in 2010 was to make health care coverage available to more people. One way to do this was to help small businesses finance the cost of providing health care coverage for their employees. The reform provides for a significant tax credit for small businesses, starting in 2010.
If you have a small business with fewer than 25 full-time workers, and their average salary is $50,000 or less, you can claim a tax credit in 2010 for 35% of the premiums you pay for health coverage for your employees. A credit directly reduces your taxes, dollar for dollar. The credit increases to 50% in 2014.
The amount of the credit you can claim depends on how many employees your business has, and their average wages. For example, the maximum credit is for business with 10 or fewer full-time employees with average annual wages of less than $25,000. The credit is gradually phased out as average wages increase from $25,000 up to $50,000, or the number of full-time equivalent workers increases from 10 to 25.
To qualify for the credit
According to the IRS, to be eligible for a tax credit, your business must cover at least 50 percent of the total premium cost for some of your workers based on the single rate. You must have less than the equivalent of 25 full-time workers. This means that you could have more than that number of part-time workers. And the average annual wages you pay must be less than $50,000. Businesses for profit as well as tax-exempt businesses can qualify for the tax credit. The maximum credit for 2010 for businesses for profit is 35% and for tax-exempt businesses, 25%.
Full-time employees are defined as those who work at least 40 hours per week. To calculate the number of full-time equivalents for part-time workers, take the total number of hours worked by your part-time employees and divide by 2080. The total number of workers for purposes of qualifying for the credit is the number of full-time employees plus the full-time equivalents of part-time employees. Owners of the business and their family members are not included. Also excluded are seasonal workers, unless they work for you on more than 120 days during the year.
To calculate the average annual wages, take the total wages paid to all employees (excluding owners and family members) and divide by the number of employees calculated above (full-time employees plus full-time equivalents of part-time employees).
The amount of premiums that qualifies for the tax credit is the amount paid by you as the employer for each employee enrolled in the health care coverage. For example, if you pay 75% of the cost and the employees pay the other 25%, the tax credit is based on the 75% you pay. The premiums you pay that qualify for the credit are subject to a limitation. This limit is the premium payments you would have paid for the small group market in your state, or area within your state. These small group market rates are set by the Department of Health and Human Services and can be found in Revenue Ruling 2010-13.
How to claim the credit
The tax credit for health care coverage for your employees is claimed when you file the annual income tax return for your business. You can claim the credit for all qualifying health care coverage premiums paid during the year, including those paid before the health reform legislation was enacted. And you can take the credit into consideration in calculating the estimated income tax payments you need to make during the year. The tax deductions you claim for health care coverage premiums will have to be reduced by the amount of the credit.
Making Health Reform a Reality for You: Small Business Tax Credits – HealthReform.gov
Revenue Ruling 2010-13 – IRS
Small Business Health Care Tax Credit for Small Employers – IRS
Small Business Health Care Tax Credit: Frequently Asked Questions – IRS