The Patient Protection and Affordable Care Act (known by many as Obamacare) has given many businesses and insurance agents a fair amount of headache and confusion, making health insurance more confusing and for larger companies, more expensive to provide coverage for employees. However, one positive effect that resulted from the Act is the Small Business Health Care Tax Credit.
As part of the Act, small businesses can qualify for a tax credit up to 35% of the premiums paid for their employees. The criteria for small businesses are laid out as a business having fewer than 25 full-time equivalent employees, with average wages of less than $50,000 annually. Employers with 10 or less employees, who average wages less than $25,000 annually, are eligible for the full 35% credit, with gradual reductions in the credit as either one of those marks is exceeded. Additionally, the employer must pay at least 50% of the premiums in order to be eligible for the credit (which generally is a requirement by insurance carriers for small business coverage anyway to ensure adequate participation), and only the amount paid by the employer is eligible for the credit. The credit is potentially capped by the average premiums in the state the coverage is provided, which will vary from year to year. As presented here, this credit will run from 2010 to 2013, but there will be an enhanced version of the credit available to employers starting in 2014, so owners do not need to worry about beginning benefits while the credit is available, only to have to discontinue after the credit expires.
Full-time equivalent (FTE) employees means that part-time employees will get counted as a percentage of a FTE employee based off the number of hours that employee works. This will factor into the calculation of the percentage of allowable credit. Owners of the company as well as their family members are generally not used in the calculation of the credit, depending on the structure of the business and the relationship to the owner. This is often beneficial in that these are often the most highly-compensated employees, and would drive up the average salary and reduce the credit; additionally, many small business structures require owner’s benefits to be removed from the company’s calculations towards income anyway.
Tax credits are more beneficial than tax deductions in that they directly reduce tax liability, rather than taxable income. It should be noted that any tax deduction for the paid premiums is reduced by amount of the credit received, but the remaining premium is still tax-deductible as well.
This tax credit may be the difference between the affordability of health insurance for a small business and not. Providing benefits to employees is an important motivator for them, so adding benefits makes a business more attractive for work. You will want to discuss the credit with your CPA, but taking advantage of the Small Business Health Care Tax Credit is a benefit available that is worth taking advantage of.
To ensure compliance with requirements imposed by the IRS, I am required to inform you that any U.S. federal tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending to another party any transaction or matter addressed herein.
Sources:
IRS, “Notice 2010-44.” http://www.irs.gov/pub/irs-drop/n-10-44.pdf
IRS, “Notice 2010-82.” http://www.irs.gov/pub/irs-drop/n-10-82.pdf
IRS, “Small Business Health Care Tax Credit: Frequently Asked Questions.” http://www.irs.gov/newsroom/article/0,,id=220839,00.html