Small Business Health Care Tax Credit
updated July 2013
Effective for 2010, many small businesses and not-for-profit organizations providing health insurance to their employees will qualify for a special tax credit of up to 35% (25% for tax-exempt organizations). This tax credit is designed to encourage small businesses to offer or continue to offer health insurance to their employees. Certain eligibility criteria must be met, and that information is available at www.IRS.gov. In general, the tax credit is available to small businesses that pay at least half the cost of single coverage for their employees, employ fewer than 25 employees AND pay wages averaging less than $50,000 per year.
The maximum credit (i.e. 35%) is available to smaller employers, those with 10 or fewer employees, paying annual average wages of $25,000 or less per year. In 2014, the tax credit will increase to 50% of premiums paid by eligible small businesses and 35% of premiums paid by eligible tax-exempt organizations.
Key elements from the guidance recently released by the Administration include:
- Detailed Guidance on Eligibility: The Internal Revenue Service issued new guidance (IRS Notice 2010-44), which outlines detailed guidelines on how a small business can determine whether it is eligible for the health care tax credit and how large a credit it will receive. The credit is generally available to employers that have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. The new credits will likely provide assistance to an estimated four million small firms that provide health coverage to their workers. Use a simple formula from the IRS to see if your business is eligible.
- No Reduction Due to State Credits: The new tax credit will not be reduced by a state health care tax credit or subsidy. This means that an employer that receives a state tax credit or subsidy also will receive the full federal credit based on its entire contribution - as long as the federal credit does not exceed the employer's net contribution. See the Kansas Insurance Department site for additional details.
- Dental and Vision Coverage Qualify: Small businesses can receive the credit not only for traditional health insurance coverage but also for add-on dental, vision, and other limited-scope coverage.
- Method for Determining Hours Worked: The new guidance allows employers to choose among three different methods of determining the number of hours worked. Employers can choose the most favorable method of determining hours worked in order to receive the maximum tax credit for which they are eligible.
- Transition Relief for 2010 Formalized: Because the tax credit is effective for 2010 (but was not enacted until March 23), some small businesses that are providing health insurance in 2010 may not meet all the requirements for a qualifying health insurance offer. Beginning in 2010, the Administration is easing the requirement that the employer pay a uniform percentage (not less than 50 percent) of the health insurance premium for each employee enrolled in health insurance coverage. Specifically, qualifying employers must only contribute 50 percent of the premium for single coverage (even if the employee elects family coverage.
Example of Interaction with State Credit
Auto Repair Shop Receiving 40% State Credit Also Receives Full Federal Credit – Together Covering 75% of
Employer’s Health Insurance Costs
||Main Street Mechanic
|Number of Employees
|Average Annual Wage
|Employer Contribution to Health Insurance
(before any credits)
($10,000 per worker)
|State Small Business Health Care Tax Credit
|Net Employer Contribution
($100,000 minus $40,000)
|Employer Contribution Qualifying for Federal tax Credit
|Federal Tax Credit
(35% of $100,000)
|Combined Federal and State Credits
($40,000 plus $35,000)
Example of Benefit for Offering Limited-Scope Coverage
Manufacturing Firm with 10 Employees Gets $3,500 More for Offering Vision and Dental Coverage
||Acme Air Conditioning, LLC
|Number of Employees
|Average Annual Wage
|Employer Cost for Regular Health Insurance
($6,000 per worker)
|Employer Cost for Add-On Vision and Dental Plan
($1,000 per worker)
|Tax Credit for Regular Health Insurance
(35% of $60,000)
|Additional Tax Credit for Vision and Dental Plan
(35% of $10,000)
|Total Tax Credit
(35% of $70,000)