| Many of our clients recently received a postcard from the IRS about the new tax credit for providing health insurance to your employees (as outlined in the recent health care reform legislation). You may have wondered how this will affect you and your business.On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (P.L. 111-148), and 7 days later, he signed numerous amendments to the legislation. This letter provides a description of the small business tax credit and illustrations of the phaseout for qualifying employers’ contributions toward their workers’ health insurance premiums. This credit is available for businesses with fewer than 25 full-time equivalent employees (FTEs) with average annual wages of less than $50,000. Small employers will be eligible for a tax credit, provided they contribute at least 50% toward their employees’ health insurance.
Starting this year and through 2013, the credit will cover up to 35% of a qualified for-profit employer’s contributions to health insurance.
Example: If WindPower, Inc. paid 60% of employees’ health premiums, the maximum small business tax credit through 2013 is 35% of WindPower’s contribution. Assuming the average total premium for WindPower is $7,500 per employee, and WindPower’s contribution is $4,500 (60%) per FTE, the maximum tax credit is $1,575 per FTE (35% of $4,500).
Beginning in 2014, the maximum credit is 50% of the employer’s contribution toward premiums. The small business tax credit that is available beginning in 2014 only is available to an employer for 2 consecutive tax years, beginning with the first year that the employer offers coverage through an exchange. Thus, the small business tax credit is potentially available for a total of 6 years – the initial credit availability from 2010 through 2013, plus the 2-year credit period beginning as early as 2014.
Small employers can claim the full credit amount if they meet the following two criteria:
1. The employer has 10 or fewer FTEs. FTEs are calculated by dividing the total hours worked by all “employees” (see description below) during the tax year by 2,080 (with a maximum of 2,080 hours for any one employee).
2. The employer’s average taxable wages are $25,000 or less. This is calculated by dividing the aggregate amount of wages paid to the “employees” during the year by the number of FTEs (and then rounding to the nearest $1,000).
For calculating the number of FTEs and their wages, the term “employees” excludes seasonal workers (working no more than 120 days during the year). In addition, the term “employees” excludes the following: a self-employed individual, a 2% shareholder in an S corporation, a 5% owner of an eligible small business, or someone who is related to or a dependent of these people. Thus, for example, the business will not receive a credit for small business owners or their family members.
Small employer’s will find the full credit phased out as the number of FTEs increases from 10 to 25 and as average employee compensation increases from $25,000 to $50,000. Below is a table to help determine, as a percentage, the amount of the maximum tax credit employers will receive on their contribution toward an employee’s health insurance from 2010 through 2013.
Small Business Tax Credit as a Percent of
Employer Contribution to Premiums for 2010-2013 |
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