Unlocking the Small Business Health Care Tax Credit
If you are a small employer, there is a tax credit that can put money in your pocket. The small business health care tax credit benefits employers that:
- Have fewer than 25 full-time equivalent employees
- Pay average wages of less than $50,000 a year per full-time equivalent (indexed annually for inflation beginning in 2014)
For tax year 2014, the inflation-adjusted amount is $51,000; for 2015, it is $52,000; for 2016, it remains $52,000; and for 2017, it rises to $53,000.
Employers must also offer a qualified health plan to their employees through a Small Business Health Options Program (SHOP) Marketplace or qualify for a limited exception to this requirement. Additionally, they must pay at least 50 percent of the cost of employee-only health care coverage for each employee.
The maximum credit is:
- 50 percent of premiums paid for small business employers
- 35 percent of premiums paid for small tax-exempt employers
The credit is available to eligible employers for two consecutive taxable years. The amount of the credit you receive works on a sliding scale: the smaller the employer, the bigger the credit. For instance, if you pay $50,000 a year toward employees’ health care premiums and qualify for a $10,000 credit each year, you can save $20,000 over two years.
Even if your small business does not owe tax during the year, you can carry the credit back or forward to other tax years. Eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.
The credit is refundable, so if you’re tax-exempt and have no taxable income, you may be eligible to receive the credit as a refund, provided it does not exceed your income tax withholding and Medicare tax liability. Refund payments issued to small tax-exempt employers claiming the refundable portion of the credit are subject to sequestration.
You can benefit from the credit this year or in previous years. If you didn’t claim it on your tax return, there’s still time to file an amended return. Refund limitations may apply. Generally, a claim for refund must be filed within three years from the time the return was filed or two years from the time the tax was paid.
Determining FTEs for the Health Care Tax Credit
In general, you’ll consider all employees who perform services for the small employer during the tax year when determining the number of your full-time equivalent employees (FTEs), as well as average annual wages and premiums paid. However, do not include the wages and hours worked of certain types of employees such as owners of sole proprietorships, partners in partnerships, shareholders owning more than 2 percent of an S Corporation, owners of more than 5 percent of the business, or family members of these individuals.
For purposes of the health care tax credit, one FTE generally equals 2,080 hours per year. Any number of part-time employees that work a combined number of hours equal to that of a full-time employee equals one FTE. For example, two half-time employees count as one FTE; 20 half-time employees are equivalent to 10 FTEs. Exclude from the calculation hours that exceed 2,080 and seasonal employees who work 120 or fewer days per year.
Calculating Average Annual Wages
If you pay total annual wages of $200,000 to your 10 FTEs, you divide $200,000 by 10 — the number of FTEs — to determine your average annual wage. In this example, the average annual wage would be $20,000.
Claiming the Health Care Tax Credit
You must use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. For detailed information on filling out this form, see the InstructionsPDF for Form 8941.
If you’re a small business, include the amount as part of the general business credit on your income tax return. If you’re a tax-exempt organization, include the amount on line 44f of Form 990-T, Exempt Organization Business Income Tax ReturnPDF. You must file Form 990-T to claim the credit, even if you don’t ordinarily do so. If you are a small business employer, you may be able to carry the credit back or forward. And if you are a small tax-exempt employer, you may be eligible for a refundable credit.
