Small employers are able to claim a tax credit for providing health insurance to their employees. In order to qualify for the tax credit, an employer must:
- Have fewer than 25 full-time employees
- Have annual wages that average less than $50,000 per employee
- Pay at least 50% of employee insurance premiums
This article is a summary of the information. Download the complete information for Calculating and Claiming the Health Care Tax Credit or visit one of the links below.
How to Calculate the Tax Credit
A tax credit calculator is located at: www.smallbusinessmajority.org/tax-credit-calculator or www.nfib.com/issues-elections/healthcare/credit-calculator.
1. Calculate the Maximum Amount of the Credit
Through 2013, the maximum credit for a taxable small employer is 35 percent of the premium payments taken into account. For a tax-exempt small employer for those years, the maximum credit is 25 percent of premium payments. In 2014, this maximum credit will increase to 50 percent of premiums paid for taxable business employers and 35 percent of premiums paid for tax-exempt organizations, and will be available when coverage is purchased through an ACA insurance exchange.
2. Reduce the Maximum Credit Under the Phase-out Rule
Although the credit is available to small employers with fewer than 25 FTEs and average annual wages of less than $50,000 per FTE, the credit is gradually phased out for small employers with more than 10 FTEs and average annual wages in excess of $25,000.
The following rules apply to the phase-out calculation:
- If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction. The numerator of the fraction is the number of FTEs in excess of 10 and the denominator is 15.
- If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction. The numerator of this fraction is the amount by which average annual wages exceed $25,000 and the denominator is $25,000.
In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the employer’s actual credit.
For an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the total reduction is the sum of the two reductions. This may reduce the credit to zero for some employers with fewer than 25 FTEs and average annual wages of less than $50,000.
3. For Employers Receiving a State Credit or Subsidy for Health Insurance, Determine the Employer’s Actual Premium Payment
If a state tax credit or a premium subsidy is paid directly to the employer, the effect on calculation of the federal health care tax credit in general is zero. If a state makes payments directly to an insurance company, the state is treated as making these payments on behalf of the employer.
How to Claim the Tax Credit
The health care tax credit is claimed on an eligible small business’s annual income tax return. For a small business, the credit is a general business credit that offsets the employer’s actual tax liability for the year. Any unused credit amount can be carried back one year and carried forward 20 years.
More Information About Claiming the Tax Credit
More information about the tax credit, including tax tips, guides and answers to frequently asked questions, is available from the IRS at: www.irs.gov/newsroom/article/0,,id=223666,00.html.
For a tax credit calculator, please see www.smallbusinessmajority.org/tax-credit-calculator or www.nfib.com/issues-elections/healthcare/credit-calculator.