The Small Business Health Care Tax Credit

5/1/2010 | Written by: Karen Reed, EA

The Small Business Health Care Tax Credit is one of the new provisions of the Patient Protection and Affordable Care Act, signed by President Obama on March 23, 2010. Small businesses and tax exempt organizations that qualify will be able to claim the credit on 2010 income tax returns filed in 2011. For–profit businesses will claim the credit as part of the General Business Credit. Filing instructions for tax exempt organizations will be released later this year by the IRS.

Small employers that pay at least half the cost of single coverage for their employees are eligible. To qualify, an employer must have fewer than the equivalent of twenty–five full–time workers earning average annual wages below $50,000. The number of full–time equivalent employees is determined by dividing the total hours for which wages are paid (not to exceed 2080 hours per employee) by 2080.

The maximum credit is thirty–five percent of premiums paid in 2010 for small businesses and twenty–five percent for qualifying tax exempt organizations. In 2014, the maximum credit amount jumps to fifty percent of premiums paid by qualifying small businesses and thirty–five percent of premiums paid by eligible tax exempt organizations. The maximum credit will be available to employers with ten or fewer employees. There is a gradual phase–out of the credit for employers with the equivalent of between ten and twenty–five full–time workers, and for businesses with employees earning average annual wages between $25,000 and $50,000.

Only premiums paid by an employer under an arrangement meeting certain requirements may be used in calculating the credit. Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage. In addition, the premiums used to calculate the credit must not exceed the average premiums for the small group market in the employer’s state. For tax exempt organizations, the credit amount must not be more than the total amount of income tax and Medicare tax withholding plus the employer’s share of Medicare tax.

Here is an example of how the credit is calculated:

A business employs ten full–time employees. The amount of total wages paid is $250,000, or an average of $25,000 per full–time equivalent worker. The business pays employee health care costs of $70,000. In 2010, the employer will be eligible to receive a tax credit of thirty–five percent of its health care costs, or $24,500. In 2014, the employer will be eligible to receive a tax credit of fifty percent of its health care costs, or $35,000.