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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:

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

Business Name Main Street Mechanic
Number of Employees 10
Average Annual Wage $24,000
Employer Contribution to Health Insurance (before any credits) $100,000
($10,000 per worker)
State Small Business Health Care Tax Credit $40,000
Net Employer Contribution $60,000
($100,000 minus $40,000)
Employer Contribution Qualifying for Federal tax Credit $100,000
Federal Tax Credit $35,000
(35% of $100,000)
Combined Federal and State Credits $75,000
($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

Business Name Acme Air Conditioning, LLC
Number of Employees 10
Average Annual Wage $25,000
Employer Cost for Regular Health Insurance $60,000
($6,000 per worker)
Employer Cost for Add-On Vision and Dental Plan $10,000
($1,000 per worker)
Tax Credit for Regular Health Insurance $21,000
(35% of $60,000)
Additional Tax Credit for Vision and Dental Plan $3,500
(35% of $10,000)
Total Tax Credit $24,500
(35% of $70,000)