In 2010, Congress enacted the Small Business Health Care Tax Credit to encourage small business owners to offer health-care benefits to employees-- and they threw in an incentive: a tax credit. If your business pays at least one-half the cost of health insurance coverage for your employees, you are eligible to take the credit.
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But many businesses owners overlook this credit when filing their taxes. A recent report from the Treasury Inspector General for Tax Administration (TIGTA) showed approximately 4.4 million taxpayers potentially qualify for the break, but as of mid-May 2011, the IRS reports that just more than 228,000 taxpayers had claimed the credit for a total amount of more than $278 million.
The Congressional Budget Office estimated the Credit would cost $37 billion over 10 years and that taxpayers would claim up to $2 billion of Credit for Tax Year 2010. But it didn’t happen that way. It’s still too early in this tax season to tell if more business owners are taking advantage of this credit on their 2011 income tax returns.
The basic requirements are as follows:
- You must employ 25 or fewer employees (FTEs -Full Time Equivalent Employees). FTEs are calculated by dividing the total hours worked by all employees during the tax year by 2,080. If you have seasonal workers who worked less than 120 hours do not include their hours
- The average annual earnings per employee must be less than $50,000, otherwise no credit will be granted. This is determined by excluding owners (partners, sole proprietors, more than 2% shareholders of S Corporations, and less than 5% owners of all other entities), family members of owners, and seasonal workers who put in less than 120 hours
- The company must have paid at least one-half of the health premium cost
As you can see, determining the amount of a credit is a complicated process because it is calculated on a sliding scale depending on a number of factors. Employers with 10 or fewer full-time employees, paying annual average wages of $25,000 or less, qualify for the maximum credit – 35%.
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If you have more than 10 FTEs and average annual wages of more than $25,000 your credit will be reduced and may end up at zero.
For tax-exempt employers, the maximum tax credit is 25% of eligible premium expenses for tax years 2010 – 2013, increasing to 35% in 2014. This credit is refundable for non profits and reported on Form 990-T line 44f.
The insurance plan must be a legitimate health insurance policy or reimbursement plan. Accident and disability policies, worker’s compensation or liability policies do not qualify. Health insurance that does qualify includes dental, vision, nursing home, long term care, and home health care plans.
In order to take the credit, complete Form 8941 Credit for Small Employer Health Insurance Premiums and transfer the credit amount to Form 3800.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.