You have a lot of choices to make as a small business owner regarding employee perks and benefits. By providing the appropriate perks, you might encourage experienced candidates to apply for positions while encouraging current workers to stay with your business longer than you had anticipated. Health insurance is among the most crucial employee perks to think about, and if you're concerned about the cost, there's a tax credit that can help you as long as your company or organisation is eligible. Here are the details you should be aware of regarding the tax credit that can be used to lower the cost of offering health insurance to your employees. Keep in mind that small tax-exempt organizations can also use it.
What is the Small Business Health Care Tax Credit ?
Small employers in the US are eligible for the Small Business Health Care tax credit. Small firms can use the small-business health care tax credit to reduce the cost of the employee health insurance premiums they must pay. Employers who enroll in the program and buy health insurance are eligible for a tax credit of up to 50% of their premium contributions.
Small businesses must pay at least 50% of the cost of an eligible health plan offered to their employees through the Small-Business Health Options Program Marketplace (SHOP), have less than 25 full-time equivalent employees, and pay an average salary of less than $55,000 to qualify.
Another aspect of the ACA is the small business health care tax credit, however it is only available to businesses with less than 25 employees. It is a credit on a sliding scale determined by the size of the employer. The tax credit decreases with employer size and vice versa. The maximum credit is 50% of small company employer premium costs or 35% of small tax-exempt employer premium costs.
For two consecutive tax years, qualifying businesses can take advantage of the small business health care tax credit. The benefit can be carried back or forward to previous tax years if you own an eligible small business and your company didn't owe any taxes in that year. You can deduct employer health insurance premium payments that you made in excess of the permitted credit as a business cost. To claim this credit, you need to fill out Internal Revenue Service (IRS) Form 8941 with your business tax return.
How Does the Small Business Health Care Tax Credit Works ?
There is a tax credit available to small employers that can put money in your pocket. A small business is one with less than 25 full-time equivalent employees for the purposes of this tax credit (FTE). An FTE is defined by the IRS as someone who clocks in at least 2,080 hours annually.
If you just have full-time employees, calculating your total number of full-time equivalent workers is simple. If you have part-time workers, things become challenging. A full-time employee may be created by combining many part-time workers. If you employ part-time workers, the IRS provides examples of how to calculate your FTEs.
You must pay each full-time equivalent employee an average annual wage that is less than $55,000 for the duration of the year. Take the total salaries paid to full-time equivalent employees and divide it by the total number of employees to arrive at the average wage.
To qualify for this credit, you must also contribute to the health insurance coverage for certain of your staff members. You must pay a uniform percentage of the cost of at least 50% and provide eligible health insurance to your staff through the Small-Business Health Options Program Marketplace (SHOP).
If you offer family health care plans, you just need to pay at least 50% of the employee-only premium costs to be eligible. You do not need to pay for the entire family plan.
Small businesses and nonprofit organizations can typically only qualify for the Small Business Health Care Tax Credit by signing up for a Small Business Health Options Program (SHOP) plan. Visit Healthcare.gov to learn more about the eligible health plans available through the SHOP Marketplace.
Key Facts of Small Business Health Care Tax Credit
- One of the benefits that you could give your staff is health insurance.
- It can be expensive to pay for health insurance premiums, especially for small firms.
- If a company meets certain requirements, provides a qualified health plan through the SHOP Marketplace, and covers at least 50% of the cost of employee-only health plans, the small business health care tax credit may be used to offset the costs.
- Small firms that qualify may carry the credit either forward or backward.
- Small tax-exempt organizations that qualify may apply for a refundable credit.
Who Qualifies for the Small Business Health Care Tax Credit ?
If you meet the requirements, you may be eligible for the Small Business Health Care Tax Credit, which is worth up to 50% (or 35% for non-profit businesses) of the premiums you pay for your employees. Your business may eligible for small business health care tax credit if :
- You don't have more than 25 full-time workers.
- You cover at least half of the premium expenses for your full-time employees.
- Your typical employee makes no more than $55,000 a year.
- All of your full-time staff members have access to SHOP coverage.
The credit operates on a sliding scale depending on the size of the company, as was already mentioned. If you have more than 10 FTE employees or an average wage of more than $27,000, the maximum credit is lowered (also indexed annually for inflation).
The tax credit is also available to tax-exempt organizations. If your firm is tax-exempt, the credit is refundable as long as it doesn't exceed your Medicare tax liability and income tax withholding. Sequestration applies to refunds to tax-exempt organizations, which means the refundable amount will be diminished by the sequestration rate for the current fiscal year.
To qualify, employers do not have to pay 50% of dependent or family health insurance alternatives. To be eligible for the tax credit, you are not required to extend it to dependents or workers who put in fewer than 30 hours a week.
How to Calculate the Small Business Health Care Tax Credit ?
1) FTE Calculation :
For the purposes of the tax credit, one FTE employee equals 2,080 hours annually. This is in contrast to other ACA rules that define one FTE employee as working 30 hours per week. One full-time employee (FTE) is equal to any number of part-time workers who collectively work 2,080 hours a year.
Over 2,080 hours a year worked by a single employee do not count toward FTE and are therefore not included in the computation. Additionally, any seasonal workers with a calendar year of fewer than 120 days should be eliminated from the calculation. However, the employer-paid health insurance premiums for temporary employees may still be taken into account when determining the credit amount.
Additionally, the following should not be included when determining FTE employees, and any premiums paid for these people should not be included when determining the credit amount:
- A sole proprietorship's owner
- An associate in a partnership
- Shareholder that owns more than 2% of a S corporation
- 5% or more of a business's owner
- Relatives of the aforementioned
2) Calculation of Average Annual Wages :
Your average annual wage is calculated by dividing the total yearly wages you pay to all of your eligible employees by the total number of FTE employees. For instance, if you paid your 10 FTE employees a total of $240,000, you would divide $240,000 by 10 to get an average yearly compensation of $24,000.
3) Limit on Premiums :
Employer-paid premiums are limited to the amount that would have been paid if the employer had paid the average premium for the small group market in the rating region when determining the small business health care tax credit. Accordingly, the tax credit is only available up to the lesser of the actual premiums paid by the employer or the typical premium that would have been paid in the small group market in the rating area where the employee enrolls for coverage. The Department of Health and Human Services releases an average premium table for a certain location each year.
How Much is the Small Business Health Care Tax Credit ?
Your business's size will determine how much credit you get. Generally speaking, the credit you'll receive increases with the size of the employer. The highest credit is:
- 50% of premiums paid by employers who are small businesses.
- 35% of premiums paid by small employers that are tax free.
Employers who qualify can take advantage of the credit for two consecutive taxable years, and you can carry it forward or back to a different tax year. You might be able to claim a business cost deduction for the excess premium payments if the total amount of the health insurance premium payments exceeds the credit. That represents an employee premium payment deduction as well as credit.
Claiming the Small Business Health Care Tax Credit
The credit must be computed using Form 8941, Credit for Small Employer Health Insurance Premiums. The Instructions for Form 8941 provide comprehensive information on how to complete this form.
Include the sum as part of the general business credit on your income tax return if your business is a small one.
Include the sum on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return, if your organisation is tax exempt. Even if you don't typically file the Form 990-T, you must do so in order to be eligible for the credit.
Employers with small businesses may be able to carry the credit forward or backward. Additionally, if you work for a small tax-exempt company, you can qualify for a refundable credit.
When to Claim :
You can still benefit from this tax credit even if you have no tax liability. The credit is not capped by the amount of taxes you owe for the year. The credit may be carried forward or backward if you have no taxable income for the year.
Claiming a Credit and Deduction :
You can deduct as well as claim a credit for health insurance premiums paid if you also want to deduct expenses linked to medical care. The credit taken, however, will lower the deduction.
How to Claim the Small Business Health Care Tax Credit ?
If you believe you qualify for the credit, you must first complete Form 8941 in order to determine your credit. The money will then be added to your income tax return as part of the general business credit.
You must use Form 8941 to claim the Small-Business Health Care Tax Credit. The form is then attached to your business tax return and will deduct any taxes owed. Keep in mind that you can only claim the credit once per two tax years. Consult your CPA or another tax expert for guidance if you're unsure if you qualify or how to claim this credit.
For More Information, Contact
Internal Revenue Service (IRS)
- Phone : (212) 4361000
- Website : http://www.irs.gov/
FAQ's
Can a tax-exempt organization be eligible for this credit ?
Yes, A tax-exempt organisation that falls under the description of an eligible small employer under section 501(c) of the Internal Revenue Code (Code) and is exempt from tax under section 501(a) of the Code may be eligible for the credit. Employers who are exempt from paying taxes can claim the credit, but it is only refundable up to the amount of payroll taxes they withheld in the year before the tax year began. On the Calculating the Credit page, you can find the answer to the question "What is the maximum credit for a tax-exempt qualifying employer?".
How would the credit benefit you specifically?
The highest credit is:
- 40% of premiums paid by small tax-exempt employers.
- 50% of premiums paid by small business employers.
- Employers who qualify may take advantage of the credit for two consecutive taxable years.
What kind of coverage do I need to offer to be eligible for the Business Health Care Tax Credit ?
You must next evaluate if your company pays at least 50% of an employee's "qualified health plan" after confirming that it satisfies the size and annual wage standards.
Any health plans made available through a Small Business Health Options Program Marketplace are qualified health plans.
Remember that you only need to cover at least 50% of the cost of each employee's employee-only (i.e., not dependent or family) healthcare coverage.
How does a employer apply for the credit?
In order to claim the credit, an employer (other than a tax-exempt employer) must include a Form 8941, Credit for Small Employer Health Insurance Premiums, which details the credit's calculation, with their yearly income tax return.
What happens if the employer only pays a portion of the premiums?
Only the percentage of the premiums paid by the employer is taken into account when computing the credit if the employee pays the remaining balance. For instance, only the 80 percent paid by the company counts if employees have the remaining 20 percent of the premiums deducted from their income.
If I run a small business, am I still considered an employee?
No, For details on who can be included in the FTE and average yearly wage calculations, see "Who is an employee for purposes of establishing FTEs and average earnings."
What about the small business owner's family?
Family members employed by the small employer are not taken into account when determining the credit. For details on who can be included in the FTE and average yearly wage calculations, see "Who is an employee for purposes of establishing FTEs and average earnings."
Where can employers obtain a list of the average premiums for the small group market each year, and how is the average premium for the small group market determined?
Each year, the IRS obtains the average premium statistics for the Small Employer Health Care Tax Credit from the Department of Health and Human Services (HHS). The average premium estimates for years starting in 2014 can be found on the HHS website.