Dear Tax Talk,
Can you tell me how I can qualify to get the tax credit for health insurance I pay for my employees?
Beginning tax year 2010, small-business and even domestic employers can receive a 35% income tax credit based on premiums paid to cover employees under the Small Business Health Care Tax Credit. The credit is for a small business, which means a few conditions have to be met. First, the employer has to have fewer than 25 full-time equivalents, or FTEs. Second, the average annual wages should be below $50,000 per FTE, though the credit will be reduced if the annual average wage is greater than $25,000. Lastly, as the employer, you have to pay health insurance premiums under a "qualifying arrangement," which basically means you pay a uniform percentage of not less than 50% of the premium cost of coverage for each enrolled employee.
In passing this legislation, Congress gives the Internal Revenue Service a bunch of new terms to interpret. To figure who is a full-time employee you have to look at hours, days or weeks worked by all employees during the year. The magic number here is 2,080 hours, which equals one FTE. If you have four employees each working 20 hours a week for six months of the year, you count the four as one FTE (four employees times 20 hours times 26 weeks equals 2,080 hours).
The amount of average annual wages is determined by first dividing the total wages paid by the employer during the employer's tax year to employees who perform services for the employer during the tax year, by the number of the employer's FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000). Wages include all wages paid during the year including vacation, sick, bonus and commissions.
For example, for the 2010 tax year, an employer pays a total of $224,000 in wages to employees who perform services for the employer during the tax year and who has 10 FTEs. The employer's average annual wages are $22,000 ($224,000 divided by 10 equals $22,400, rounded down to the nearest $1,000).
Business owners and family members are excluded in computing FTE and average annual wages. There is no credit on their premiums either.
The credit is reduced when the employer has more than 10 FTEs or the average annual wage exceeds $25,000. The employer's premium deduction is reduced by the amount of the credit.
Employers should use Form 8941 to claim the credit.