Small Business Health Care Tax Credit - Does Your Business Qualify?
Posted: 6/2/10
Dear Client,
The new healthcare bill includes a tax credit small businesses can claim to help offset the cost of health care premiums. The credit is 35% of health insurance premiums paid for employees (not owners). Tax-exempt organizations can also claim the credit but the percentage is only 25% of employee health insurance premiums and the credit cannot exceed employer and employee Medicare tax paid.
To claim the tax credit the business or tax exempt organization must:
- Have fewer than 25 full time equivalent employees,
- Whose average annual wages are less than $50,000, and
- Maintain a “qualifying arrangement”, where the employer pays premiums for each employee enrolled in health insurance coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage.
How do you know if your business qualifies?
Step 1: Calculate the number of full time equivalent employees (FTEs)
FTEs = # of full time employees + (total annual hours of part-time employees / 2,080)
Do not include owners or family members in the above equation. They are not counted in determining whether your business qualifies for the health care credit. In addition, seasonal workers are also disregarded unless they work more than 120 days but premiums paid on their behalf can be counted when calculating the credit.
Also, the IRS has listed several methods to determine the annual hours of employees. The above calculation is for a reference point only. Additional IRS literature should be consulted.
Step 2: Calculate the average annual wages of the employees included above.
Step 3: Divide Step 1 by Step 2 to see whether average annual wages are less than $50,000.
Step 4: Review whether you have a “qualifying arrangement”.
For tax years beginning in 2010 there is a onetime transitional relief provision where if an employer pays at least half of the employees’ insurance premiums at the single rate it will qualify, even if the amounts paid on behalf of different employees are not equal. This will not continue into 2011.
Credit Phase Out & Common Ownership
Unfortunately, even if a business makes it to this point the credit is not guaranteed. The credit phases out gradually if the number of FTEs exceeds 10 or the average annual wages exceeds $25,000. This may result in zero credit even if the business has fewer than 25 FTEs and average annual wages of less than $50,000. Last, most businesses with common ownership must combine employees & wages when calculating the above steps.
Please contact us and we will be happy to meet with you.