In my book The Complete Guide to the Affordable Care Act, I discuss the Act in great detail. Monday we discussed Health Exchanges. Tuesday we introduced SHOPs for Small Businesses. Wednesday we are discussed Provisions for Individuals. Yesterday we talked in detail about the Requirements of Small Businesses. Today we discuss the Small Business Tax Credit.
If you are a small business with less than 25 employees and you provide health insurance, you may be eligible for a tax credit. To be eligible for the credit you must have 25 or fewer full-time equivalent employees. You must pay those employees an average wage of less than $50,000.00 a year, and pay at least half of the employee’s health insurance premiums. The White House estimates that more than 4 million small businesses will be eligible to receive a tax credit for the purchase of their employees’ healthcare.
The tax credit is calculated as a percentage of the business’ contribution to employee health insurance premiums. For tax years 2010 – 2013 the maximum percentage is 35 percent. In 2014 and beyond the maximum credit is 50 percent, but only on policies that are purchased through the Small Business Exchange.
A tax credit is a dollar for dollar credit against your tax liability for the year. Typically, if you do not have a liability, you would lose the credit. The health insurance tax credit can be carried back to a year when you did have a tax liability, or carried forward to the next year. In addition, since the amount of your businesses insurance premium would be more than the total credit, you will still be able to claim a business expense deduction for the premium payments that are more than the tax credit.
Small businesses that provide healthcare coverage are eligible for the tax credit under the following circumstances:
· The small business has fewer than 25 full-time equivalent employees for the year
· The average annual wages paid are less than $50,000.00 per full-time equivalent employees
· The employer pays at least 50 percent of the premium cost under a “qualified arrangement.”
The number of employees is determined by different factors. Employers can choose to count the hours of their employees in one of three different ways to take full advantage of the tax credit. The three different ways are:
1. Actual Hours of Service
2. Estimation by the employer based on total days of service.
3. An estimation of hours based on total weeks of service.
Part-time employees can be added to your count. The number of employees only applies to full-time equivalent employees. A full-time employee is one that works 30 or more hours per week. A part-time employee is defined as an employee that works less than 30 hours per week. Seasonal workers are not counted.
Here are some examples from the IRS on how hours are counted
Example 1
For the 2013 taxable year, an employee’s payroll records indicate that Employee A worked 2,000 hours and was paid for an additional 80 hours on account of vacation, holiday, and illness. The employer counts hours actually worked.
· Under this method the counting of hours, Employee A must be credited with 2,080 hours of service (2,000 hours worked and 80 hours for which payment was made or due)
Example 2
For the 2013 tax year, Employee B worked 49 weeks, took two weeks of vacation with pay, and took one week of leave without pay. The employer uses the weeks-worked equivalency.
· Under this method of counting hours Employee B must be credited 2,040 hours of service (51 weeks multiplied by 40 hours a week).
A “qualified arrangement” is one where an employer pays 50 percent or more of the cost of the employee-only premium for coverage through a state-licensed company for traditional health insurance.
The tax credit is calculated on a sliding scale of up to 35 percent of the employer’s eligible premium expense for tax years 2010 – 2013. Employers with 10 or fewer full-time employees, that pay annual wages of $25,000.00 or less, qualify for the maximum amount of the credit. In 2014 the maximum tax credit increases to 50 percent of the premiums paid for coverage purchased from the Exchange. The credit is only available for a total of any two years.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle, The Complete Guide to the Affordable Care Act’s Tax Provisions available on Nook and Kindle, The Complete Guide to Retirement Plans for Small Businesses available on Nook and Kindle, The Complete Guide to Estate, Gift and Trust Taxation, available on Nook and Kindle, and The Complete Guide to Hiring an Accountant, available on Nook and Kindle.
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