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Health Care Tax Credits For Small Businesses

Starting in April, millions of small businesses began to receive postcards from the Internal Revenue Service about the new small business health care tax credit

Starting in April, millions of small businesses began to receive postcards from the Internal Revenue Service about the new small business health-care tax credit. Even if a business hasnít received a postcard, it may still be eligible for this credit designed to help small businesses and nonprofit organizations that pay employee health insurance premiums in 2010, says Bill Terando, a professor of accounting at Butler University.

The credit was part of the health-care reform legislation signed into law in March. The Congressional Budget Office estimates that the tax credit will save small businesses $40 billion by 2019.

For employers to be eligible, they must pay their employeesí health insurance premiums under a qualifying arrangement--an amount equal to a uniform percentage (not less than 50%) of the premium cost of the coverage.

As a result, if an employer pays only a portion of the premiums for the coverage under the arrangement (with employees paying the rest), the amount of premiums counted in calculating the credit is only the portion paid by the employer. For example, if an employer pays 80% of the premiums for employeesí coverage (with employees paying the other 20%), the 80% paid by the employer counts in calculating the credit.

To avoid businesses trying to get a larger credit by choosing a more expensive health plan, an employerís eligible contribution is limited to the average cost of health insurance in that state.

Employers with fewer than 25 full-time employees and less than $50,000 in average wages may be able to reduce their tax obligation. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for those with the equivalent of between 10 and 25 full-time workers.

The credit is worth up to 35% of health insurance premiums paid by a business and up to 25% of those paid by a nonprofit organization. On Jan. 1, 2014, the credit percentage increases to 50% for businesses and up to 35% for nonprofit groups.

For example, a qualified business employer has nine full-time employees with average annual wages of $23,000 each. The employer pays $72,000 in health-care premiums for those employees and otherwise meets the requirements for the credit. To calculate the credit, the employer would multiply $72,000 by 35% for a credit of $25,200.
Keep in mind the amount of the credit cannot exceed the total amount of income and Medicare taxes the business is required to withhold from employeesí wages for the year, plus its share of Medicare tax on employeesí wages.

Eligible small businesses can claim the credit as part of the general business credit, starting with the 2010 income-tax return they will file in 2011. The credit is nonrefundable, but may be carried back one year and carried forward 20 years, if it is larger than a companyís tax liability. They also may reduce their estimated tax payments by the credit amount to get the benefit in the current year.