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Health Care Reform Small Business Tax Credit

What You Need to Know Now About:  Small Business Tax Credit

One of the principal objectives of the Health Care Reform Act signed into law on 3/23/2010 was to make health care coverage available to more people.  One of the primary means to accomplishing this goal was to encourage small businesses to begin, or continue, providing health care coverage for their employees.  To assist small business in achieving this objective, significant tax credits are being offered beginning with the 2010 tax year.

Click here to open a PDF version of the update.


1. As a small business owner, how do I know if I am eligible for the Small Business Tax Credit?

Eligible businesses include those that employ fewer than 25 full-time equivalent employees, have average annual wages of less than $50,000, and provide health insurance paying more than 50% of the single (employee only) coverage.


2. How do I calculate “full-time equivalent” employees?

Full-time employees are defined as those who work at least 40 hours per week.  To calculate full-time equivalents for part-time workers, take the total number of hours worked by your part-time employees and divide by 2080.  Owners of the business and family members cannot be included in this calculation.

Do you have fewer than 25 full-time equivalent employees?
If “No”, then you are not eligible for the credit.
If “Yes”, then proceed to question #3.


3. How do I calculate average annual wages?

To calculate the average annual wages, take the total wages paid for the entire company and divide by the number of full-time equivalent employees you calculated from 2. above.  Again, the annual wages for any owners of the business and family members must be removed from the calculation.

Is your average annual wage less than $50,000?
If “No”, then you are not eligible for the credit.
If “Yes”, then proceed to question #4.


4. Do you provide health insurance to your employee and pay more than 50% of the cost of the single (employee only) coverage?

Although the answer may be “yes”, it is a little more complicated than that.  Your cost of coverage cannot exceed what you would have paid if all of your employees were in a plan that had the average premium in the state for small group market plans.  In PA for 2010, it is $5,039 for single (employee only) coverage and $12,471 for family coverage. 

Did you contribute at least $2,520 ($5,039 x 50%) annually towards the cost of the coverage for each full-time equivalent employee?
If “No”, then you are not eligible for the credit.
If you answered “Yes” to questions 2-4, you are eligible for the tax credit.


5. My small business qualifies for the tax credit.  How much of a credit is available to me?

The Small Business Tax Credit is on a sliding scale with the maximum credit currently set at 35% for a taxable employer and 25% for a tax-exempt employer.  The credit percentage decreases as full-time equivalent employees and/or average annual salary increases. The maximum credit percentage increases beginning in 2014, with the establishment of the Insurance Exchanges, to 50% for a taxable employer and 35% for a tax-exempt employer. If you are a small business employing 10 or fewer full-time equivalent employees with an average annual salary of less than $25,000, the maximum credit available will apply.


6. How do I collect my tax credit?

The credit is NOT a refundable credit for the taxable employer.  Instead, it is an offset against income taxes owed.  You claim the credit 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.  You can also factor the credit into any estimated income tax payments you need to make during the year.  Naturally, any tax deductions you currently claim for health care coverage premiums will have to be reduced by the amount of the credit.  For tax-exempt employers, it is a refundable credit.


7. What are some examples of how the Small Business Tax Credit works?

The following examples are taken from the www.healthcare.gov website:

Example 1:  Auto Repair Shop

  • Full-time equivalent Employees = 10
  • Wages = $250,000 total, or, $25,000 per FTE Employee
  • Employer Health Care Cost = $70,000
     
  • 2010 Tax Credit = $24,500 (35% credit)
  • 2014 Tax Credit = $35,000 (50% credit)

Example 2:  Restaurant

  • Full-time equivalent Employees = 40 half-time Employees = 20 FTE Employees
  • Wages = $500,000 total, or, $25,000 per FTE Employee
  • Employer Health Care Cost = $240,000
     
  • 2010 Tax Credit = $28,000 (35% credit)
  • 2014 Tax Credit = $40,000 (50% credit)

Example 3:  Non-Profit

  • Full-time equivalent Employees = 9
  • Wages = $198,000 total, or, $22,000 per FTE Employee
  • Employer Health Care Cost = $72,000
     
  • 2010 Tax Credit = $18,000 (25% credit)
  • 2014 Tax Credit = $25,200 (35% credit)

8. How can I find out more about the Small Business Tax Credit?

Banyan Consulting does not provide tax advice.  You should contact your tax advisor, or, you can find more information at www.IRS.gov.