Small Business Health Care Tax Credit
If you own a small business, we have good news! You may get a tax credit of up to 35% in 2010. H&R Block brings you this tax credit calculator to help you easily estimate your tax credit amount. Small Business Tax Credit Calculator Powered by H&R Block
Certain small businesses and tax-exempt organizations that provide health insurance coverage to their employees may qualify for a special tax credit, according to the Internal Revenue Service. Included in the recently enacted health care reform legislation, the Patient Protection and Affordable Care Act (PPACA), is a tax credit designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
The following are eligibility rules and the amount of credit as explained by the IRS.
- Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.
- Firm size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
- Average annual wage. A qualifying employer must pay average annual wages below $50,000.
- Both taxable (for profit) and tax-exempt firms qualify.
Amount of Credit
- Maximum Amount. The credit is worth up to 35 percent of a small business' premium costs in 2010, and 25 percent of premiums paid by eligible tax-exempt organizations. On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers).
- Phase-out. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.
Three Simple Steps for Employers to Qualify
If you are a small employer (business or tax-exempt) that provides health insurance coverage to your employees, you can determine if you may qualify for the Small Business Health Care Tax Credit by following these 3 simple steps:
- Determine the total number of your employees, counting full-time and part-time employees separately (not counting owners or family members);
- Calculate the average annual wages of employees (not counting owners or family members); and
- Pay at least half of your employees' health premiums
For more on these steps, see "3 Simple Steps" from the IRS featured here.
Determining Full-Time Employees and Average Annual Wages
Q. How is the number of FTEs determined for purposes of the credit?
A. The number of an employer’s FTEs is determined by dividing (1) the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080. The result, if not a whole number, is then rounded to the next lowest whole number.
Example: For the 2010 tax year, an employer pays 5 employees wages for 2,080 hours each, 3 employees wages for 1,040 hours each, and 1 employee wages for 2,300 hours.
The employer’s FTEs would be calculated as follows:
(1) Total hours not exceeding 2,080 per employee is the sum of:
a. 10,400 hours for the 5 employees paid for 2,080 hours each (5 x 2,080) b. 3,120 hours for the 3 employees paid for 1,040 hours each (3 x 1,040) c. 2,080 hours for the 1 employee paid for 2,300 hours (lesser of 2,300 and 2,080)
These add up to 15,600 hours.
(2) FTEs: 7 (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number) Q. How is the amount of average annual wages determined?
A. The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer to employees during the employer’s tax year by (2) the number of the employer’s FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000). For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation).
Example: For the 2010 tax year, an employer pays $224,000 in wages and has 10 FTEs.
The employer’s average annual wages would be: $22,000 ($224,000 divided by 10 = $22,400, rounded down to the nearest $1,000).
Q. Can an employer with 25 or more employees qualify for the credit if some of its employees are part-time?
A. Yes. Because the limitation on the number of employees is based on FTEs, an employer with 25 or more employees could qualify for the credit if some of its employees work part-time. For example, an employer with 46 half-time employees (meaning they are paid wages for 1,040 hours) has 23 FTEs and therefore may qualify for the credit.
Q. Are seasonal workers counted in determining the number of FTEs and the amount of average annual wages?
A. Generally, no. Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during the tax year.
Frequently Asked Questions
The IRS has issued 24 FAQs for employers on the Small Business Health Care Tax Credit, including the following topics:
- Employer eligibility
- Claiming the credit
- Determining average annual wages
- Calculating expenses
- Tax-exempt organizations
- Relief in 2010
To view this detailed FAQ page from the IRS, please click here.
The IRS has also provided examples on factual employer scenarios, including numbers of workers, part-time employees and non-profit groups. To view the scenarios, please click here.
Updated Guidance from IRS
The IRS has issued guidance for small businesses to determine whether they are eligible for the new health care tax credit under the Affordable Care Act, and how large a credit they may receive. The guidance makes clear that small businesses receiving state health care tax credits may still qualify for the full federal tax credit. Additionally, the guidance allows small businesses to receive the credit not only for regular health insurance but also for add-on dental and vision coverage.
Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt organizations, the IRS will provide further information on how to claim the credit.
- The Internal Revenue Service has released a draft version of the form that small businesses and tax-exempt organizations will use to calculate the small business health care tax credit when they file income tax returns next year. The final version of Form 8941 and its instructions will be available later this year.
- Notice 2010-44 provides detailed guidelines, illustrated by more than a dozen examples, to help small employers determine whether they qualify for the credit and estimate the amount of the credit. The notice also requests public comment on issues that should be addressed in future guidance.
- Revenue Ruling 2010-13 also helps determine the amount of the tax credit available to certain small businesses that provide health coverage to their employees in 2010. For taxable years beginning before 2014, the amount of the credit is based on a percentage of the lesser of:
1) the amount of nonelective contributions paid by the eligible small employer on behalf of employees under the arrangement during the tax year
2) the amount of nonelective contributions the employer would have paid under the arrangement if each such employee were enrolled in a plan that had a premium equal to the average premium for the small group market in the State (or in an area in the State) in which the employer is offering health insurance coverage.
Revenue Ruling 2010-13 provides a chart that sets forth the average premium for the small market group in each State for the 2010 tax year. The chart shows the average premium in each State for both single and family (all other) coverage. To view the chart, please see Revenue Ruling 2010-13 by clicking here. For the 2010 tax year, the U.S. Department of Health and Human Services may provide additional average premium rates for the small group market in certain areas within States. However, in no case will any such additional sub-State rates be lower than the rate for each State that is set forth in the Revenue Ruling.
Click here for a Flyer on the Small Business Health Care Tax Credit for Small Businesses.