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How Does My Business Qualify for a Small Business Health Care Tax Credit?

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Question: How Does My Business Qualify for a Small Business Health Care Tax Credit?
Answer:

About the Small Business Health Care Tax Credit
The Small Business Health Care Tax Credit is available to small businesses starting in 2010, through 2013. This new credit helps small businesses by providing a tax credit to offset some of the cost of providing health care coverage to employees. The tax credit is available to businesses that employ only a few workers whose wages are under $50,000 on average; it's specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. Specifically, to qualify for the tax credit, your business must meet all of these requirements:

  • You must cover at least 50 percent of the cost of health care coverage for some of your employees, based on the single rate
  • You must have less than the equivalent of 25 full-time employees (that is, under 25 FTE's - see below to calculate FTE's), and
  • You must pay average annual wages below $50,000.

Health Care Tax Credit Amount
The credit is worth up to 35 percent of your premium costs for each year 2010 through 2013, increasing to 50 percent in 2014. The credit is reduced for companies with average wages between $25,000 and $50,000 and for companies with the equivalent of between 10 and 25 full-time workers. Note: Only employers with 10 or fewer FTE employees and average wages of $25,000 or less receive the full 35 percent tax credit; the credit is reduced above 10 FTE's and above $25,000 average wages.

How to Qualify for a Small Business Health Care Tax Credit
The IRS has prepared guidelines a small business can use to determine eligibility for and application for the small business health care tax credit.

Calculating Full-time Equivalents (FTE's)
Before you can determine if your business qualifies for the health care tax credit, you must determine if you have the required number of full time equivalent (FTE) employees). The number of FTE's you employ must be less than 25.

The number of an employer’s FTE's is determined by dividing:

  1. The total hours for which you (the employer) pay wages to all employees during the year, up to 2080 per employee, by
  2. 2,080. The result, if not a whole number, is then rounded to the next lowest whole number. So, 17.80 employees would be 17 FTE's.
Seasonal workers are disregarded in determining FTE's and average annual wages unless the seasonal worker works more than 120 days during the tax year.

The IRS provides this example:
For the 2010 tax year, an employer pays 5 employees wages for 2,080 hours each, 3 employees wages for 1,040 hours each, and 1 employee wages for 2,300 hours. The employer’s FTE's would be calculated as follows:

  1. Total hours not exceeding 2,080 per employee is the sum of:

    a. 10,400 hours for the 5 employees paid for 2,080 hours each (5 x 2,080)
    b. 3,120 hours for the 3 employees paid for 1,040 hours each (3 x 1,040)
    c. 2,080 hours for the 1 employee paid for 2,300 hours (lesser of 2,300 and 2,080)
    These add up to 15,600 hours
  2. FTE's: 7 (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number)

Applying FTE's to the Calculation for the Health Care Tax Credit

Step One: Determine the total number of FTE's If you have fewer than 25 FTE's total, you can proceed to Step Two.

Step Two: Calculate the average annual wages of employees (not counting owners or family members):
Take the total annual wages paid to employees. Divide it by the number of employees from Step One. Total wages divided by number of employees = average wages.

Step Three: Make sure your business pays at least half the insurance premiums for employees at the single (employee-only) rate.

If you meet all three criteria, you may be eligible to take the Health Care Tax Credit. Use IRS Form 8941 (PDF) to calculate the tax credit.

IRS Fact Sheet
To help you work through this calculation, the IRS has provided a helpful Health Care Tax Credit Fact Sheet in PDF form that you can work through.

More about the Health Care Law
Read more about the Health Care Law (Affordable Care Act) and the timeline for various provisions of this law that affect you and your business.

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  3. US Business Law / Taxes
  4. Tax Planning for Your Business
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  6. Small Business Health Care Tax Credit - How to Get Small Business Health Care Tax Credit

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