The Small Business Health Care Tax Credit

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The Small Business Health Care Tax Credit

As a small company owner, you must make several choices about employee perks and benefits. Offering the correct perks may inspire experienced workers to apply for employment, while encouraging existing employees to remain with your firm for a longer period of time than anticipated.

Health insurance is one of the most significant employment perks to consider. If you’re concerned about the expense, a tax credit may be available to you if your company or group qualifies. Here’s all you need to know about the tax credit, which may help you offset the cost of providing health insurance to your workers. It’s also worth noting that it’s accessible to tiny tax-exempt organizations.

Key Takeaways

  • One of the benefits you may provide to your workers is health insurance.
  • Health insurance premiums may be expensive to cover, particularly for small enterprises.
  • If a firm satisfies specified requirements, provides a qualifying health plan via the SHOP Marketplace, and pays at least 50% of the cost of employee-only health insurance, the small business health care tax credit may help offset expenses. 1
  • Small firms that qualify may carry the credit forward or backward. 2
  • A refundable credit is available to eligible small tax-exempt organizations. 3

What Is the Small Business Health Care Tax Credit?

Certain aspects of the Affordable Care Act (ACA) are exclusively applicable to small enterprises. Special insurance alternatives, for example, are exclusively accessible to firms with less than 50 workers under the Small Business Health Options Program. 4

Another ACA component is the small company health care tax credit, however it is only available to firms with less than 25 workers. It is a sliding-scale credit dependent on the employer’s size. The lower the tax credit, the bigger the employer, and vice versa. The maximum credit is 50% of small company employer premiums or 35% of small tax-exempt employer premiums.

  Credit Quality

For two consecutive tax years, qualified firms may claim the small business health care tax credit. If you own a qualified small company and do not owe tax in any given year, the credit may be carried back or forward to future tax years. The amount you paid in excess of the authorized credit for employer health insurance premiums may be claimed as a business expenditure deduction. 2

To claim the tax credit, you must complete Internal Revenue Service (IRS) Form 8941.5.

Who Qualifies for the Small Business Health Care Tax Credit?

According to the IRS, a firm with less than 25 full-time equivalent (FTE) workers is eligible for the small business health care tax credit if all three of the following conditions are met:

  • Pays less than $56,000 per year on average for each FTE employee (indexed annually for inflation starting in 2014)
  • Provides its workers with a qualifying health plan via the SHOP Marketplace (there are rare exceptions to this rule)
  • Pays at least half of the cost of each employee’s employee-only option.

As previously stated, the credit is calculated on a sliding scale dependent on the size of the company. If you have more than ten full-time workers or your average pay is more than $27,000, the maximum credit is lowered (also indexed annually for inflation).1

The tax credit is also available to tax-exempt organizations. If you own a tax-exempt company, the credit is refundable up to the amount of your income tax withholding and Medicare tax due. Sequestration applies to refunds to tax-exempt organizations, which means the refundable amount will be cut by the current fiscal year’s sequestration rate. 36

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Employers are not required to cover 50% of dependent or family health insurance alternatives in order to qualify. 3

How to Calculate the Small Business Health Care Tax Credit

Calculating FTEs

For the purposes of the tax credit, one FTE employee equals 2,080 hours per year. This contrasts with other ACA rules that define 30 hours per week to constitute one FTE employee. Any number of part-time workers totaling 2,080 hours per year equals one FTE employee.

Over 2,080 hours worked by a single employee per year do not count toward FTE and are therefore omitted from the computation. Seasonal workers who work less than 120 days per year should be eliminated from the computation as well. However, the employer-paid health insurance premiums for seasonal employees may still be included in the credit amount computation.

The following should also be omitted from the computation of FTE workers, as should any premiums paid for these persons from the credit amount:

  • Owner of a sole proprietorship
  • Partner in a partnership
  • More than 2% of a S Corporation’s shareholders
  • Owner of more than 5% of a company
  • Family members of the above2

Calculating Average Annual Wages

To calculate your average yearly salary, divide the total annual earnings you pay to all of your eligible workers by the total number of FTE employees. For example, if you paid $240,000 to your ten full-time workers, divide $240,000 by ten to get a $24,000 average yearly compensation.

Limit on Premiums

Employer-paid premiums are restricted for computing the small company health care tax credit to the premium payment that would have been made if the employer paid the average premium for the small group market in the rating region. This implies that the tax credit is restricted to the lesser of the employer’s actual premiums paid or the average premium that would have been paid for the small group market in the rating region where the employee enrolls for coverage. 3

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Assume an employer has a total of ten workers. The employer pays for half of all employee-only and family plans. Five workers are enrolled in an employee-only plan, with a total premium of $4,000. Five workers are on a family plan, each with a $10,000 premium. The total premium paid was $70,000 ((5 $4,000) + (5 $10,000)).

The company paid half of it, for a total of $35,000 ($70,000 50%) in premiums on behalf of the workers. In the employer’s small group market, the average premium for employee-only policies was $6,000 and $12,000 for family plans. Because the company paid less than the average for its region, the tax credit may be calculated using the whole amount of premiums paid on behalf of workers.

The Department of Health and Human Services publishes a yearly average premium table for a certain location.

The Bottom Line

Health insurance is a benefit that some small company owners believe is beyond of their financial reach, despite the fact that it is appealing to both potential and existing workers. Governmental incentives, such as the small business health care tax credit, are available to assist bridge the gap and provide more Americans with access to adequate healthcare. Examine the tax ramifications to determine whether it might benefit your small company.

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