Jul 7, 2018

How Small Employer Tax Credits Can Impact Your Business

Small Employer Tax CreditSmall Employer Tax Credits

The Affordable Care Act helps small businesses and small tax-exempt organizations afford the cost of covering their employees.  If you have fewer than 25 employees and provide health insurance, you may qualify for a small business tax credit of up to 50% (35% for non-profits) to offset the cost of your insurance.

To take advantage of this tax credit, you must meet ALL of the following criteria:

  • Fewer than 25 full-time equivalent employees
  • Pay an average wage of less than $50,000 a year
  • Pay at least half of employee health insurance premiums

How will the credit make a difference for you?

Example: You pay $50,000 a year toward workers’ health care premiums and qualified for a 15 percent credit, you would save $7,500 a year in tax credits. Lets’ say you qualify for a slightly larger credit, maybe 20 percent, your savings would go up to $12,000 a year. The amount of credit you receive works on a sliding scale, with the smaller the business or charity yielding the greater amount of credit.

Also, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That is both a credit and a deduction for employee premium payments.  The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability.  Also, as a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years.

To be eligible, you must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs). Those employees must have average wages of less than $50,000 a year.

Small Employer Tax Credit CalculatorWhat is considered a full-time equivalent employee? Basically, two half-time workers count as one full-timer. Here is an example, 20 half-time employees are equivalent to 10 full-time workers. That makes the number of FTEs 10 not 20.

How do you compute average wages?  You total annual wages are $200,000 and you have 10 FTEs. Divide $200,000 by 10 (number of FTEs) …the result is your average wage of $20,000 a year.

How do you claim the credit?

You must use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit.

If you are a small business, include the amount as part of the general business credit on your income tax return.

If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don’t ordinarily do so.

For more up to date information on the Small Business Health Care Tax Credit, go to: https://www.irs.gov/newsroom/small-business-health-care-tax-credit-questions-and-answers

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