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Small Business Health Care Tax Credit for 2014

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Small Businesses need to know about this employer health care credit. Can this employer health care credit make a difference for you?

We would like to let small businesses know how to reduce their health insurance costs with this employer health care credit. This tax credit is available to certain small businesses that provide health insurance coverage to their employees. The credit is designed to assist small businesses that employ low and moderate income workers.

For tax years beginning after 2014, the amount of the credit is generally 50% of the employer's non-elective contributions. Health insurance premiums paid with employer-provided credits/benefits that employees can elect to receive as cash or other taxable benefit are not eligible. Basically, only premiums paid directly by the employer.

The credit amount is subject to reductions and requirements.

An eligible small employer has to meet all of the following requirements:

(1) The employer can't have more than 25 full-time equivalent employees (FTEs) for the tax year. An employer's FTEs are determined by dividing the total hours worked by all employees during the year by 2,080 (rounded down to the nearest whole number).

(2) The average annual wages of the employees can't exceed $50,800 in tax years beginning in 2014. Average annual wages are established by taking total wages paid by the employer divided by the number of its FTEs and then rounding that number down to the nearest $1,000.

(3) The employer has to contribute at least 50% of the premiums for the employees' health insurance coverage on a uniform basis.

The amount of the credit is reduced when the number of FTEs starts to exceed ten or the average annual wages goes above $25,400 in 2014. An illustration of the credit reduction is beyond the scope of this article. Notice 2010-82 http://www.irs.gov/pub/irs-drop/n-10-82.pdf provides guidance that a curious small business owner can read to learn more about the details of this credit.

For purposes of the credit, self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer and certain relatives of these individuals are not treated as employees for purposes of the small employer health insurance credit.

Additionally to qualify for the tax credit, the small business must purchase coverage through a small business health options program exchange (SHOP Exchange). The credit is only available for a maximum period of two consecutive years.

Calculating the employer health care credit can be cumbersome, we use an Excel template to calculate the credit. This makes the calculation easier to complete when preparing the tax return for the second year. We often can provide practical tips over the phone for calculating the tax credit. Contact us for help or advice on employer health care credits or any other tax issues.

Any tax advice in this communication is not intended or written to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any matters addressed herein.

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