New Health Care Tax Credit: An Incentive For Small Businesses

The Patient Protection and Affordable Care Act, signed by President Obama in March of this year, con-tains a provision that targets employers with low and moderate income workers.

The Small Business Health Care Tax Credit, generally, is designed to aid employers with fewer than 25 full-time equivalent employees who pay wages averaging less than $50,000 per employee per year. For these companies paying at least half the cost of single health insurance coverage for their employees, the credit available may be up to 35 percent of the premiums paid.The Small Business Health Care Tax Credit is one portion of the Affordable Care Act that takes effect in 2010. Businesses will begin applying for the credit in 2011 when filing their 2010 tax returns. For 2010, the credit is worth up to 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. On Jan. 1, 2014, the rate increases to 50 percent for businesses and 35 percent for tax-exempt employers.

The IRS has listed “three simple steps” for employers to qualify. The first step is determining the company’s total number of employees (not counting owners or family members.) This means counting all full-time employees and full-time equivalent employees (FTEs are calculated by totaling all annual hours worked by part-time employees, and dividing by 2080.) This total must be fewer than 25.

The second step is calculating the average annual wages of employees (not counting owners or family members.) Take the total annual wages paid and divide by the number of employees in step one. If the result is less than $50,000 then move on to step three.

The last step is simply a question: Does the company pay at least half of the insur-ance premiums for the employees at the single (employee-only) coverage rate? If so, then the employer may be able to claim the Small Business Health Care Tax Credit.

What’s important to remember is that this is a new piece of legislation and some issues are still being determined. Any employer who believes they may qualify for the credit should consult their CPA or tax attorney before changing any strategies or policies within the business. The IRS is updating its website frequently, adding more updates, tools and notices, including a great FAQ document. To find more information on this topic visit www.irs.gov and enter “health care tax credit” in the search field.