Starting in April, millions of small businesses began to receive postcards from the Internal Revenue Service about the new Small Business Health Care Tax Credit. Even if your business hasn’t received a postcard, you may still be eligible for this credit designed to help small businesses and non-profit organizations that pay employee health insurance premiums in 2010.
The credit was part of the health care reform legislation, the Patient Protection and Affordable Care Act, approved by Congress and signed into law by President Barack Obama in March.
The Congressional Budget Office estimates that the tax credit will save small businesses $40 billion by 2019.
For employers to be eligible, they must pay their employees’ health insurance premiums under a “qualifying arrangement” — i.e., in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage.
As a result, if an employer pays only a portion of the premiums for the coverage under the arrangement (with employees paying the rest), the amount of premiums counted in calculating the credit is only the portion paid by the employer. For example, if an employer pays 80 percent of the premiums for employees’ coverage (with employees paying the other 20 percent), the 80 percent premium amount paid by the employer counts in calculating the credit.
To avoid businesses trying to get a larger credit by choosing a more expensive health plan, an employer’s eligible contribution is limited to the average cost of health insurance in that state.
Employers with fewer than 25 full-time employees (more if you have part-time employees) and less than $50,000 in average wages may be able to reduce their tax obligation. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for those with the equivalent of between 10 and 25 full-time workers.
The credit is worth up to 35 percent of health insurance premiums paid by a business and up to 25 percent of those paid by a non-profit organization. On Jan. 1, 2014, the credit percentage increases to 50 percent for businesses and up to 35 percent for non-profit groups.
For example, let’s say a qualified for-profit business employer has nine full-time employees with average annual wages of $23,000 each. The employer pays $72,000 in health care premiums for those employees and otherwise meets the requirements for the credit. To calculate the credit, the employer would multiply $72,000 by 35 percent for a credit of $25,200.
Keep in mind the amount of the credit cannot exceed the total amount of income and Medicare (i.e., hospital insurance) taxes the business or organization is required to withhold from employees’ wages for the year and its share of Medicare tax on employees’ wages.
For example, a qualified non-profit organization has 10 full-time employees (or their equivalent) with average annual wages of $21,000. The employer pays $80,000 in health care premiums for those employees and otherwise meets the requirements for the credit. The total amount of the employer’s income-tax and Medicare-tax withholding plus the employer’s share of the Medicare tax equals $30,000 in 2010. In this case, the credit is calculated like this:
Initial amount of credit determined before any reduction: 25 percent x $80,000 = $20,000
Employer’s withholding and Medicare taxes: $30,000
Total 2010 tax credit is $20,000 (the lesser of $20,000 and $30,000).
Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income-tax return they will file in 2011. The credit is non-refundable, but may be carried back one year and carried forward 20 years if it is larger than a company’s tax liability. They may also reduce their estimated tax payments by the credit amount to get the benefit in the current year. The credit is refundable for most non-profit organizations.
For more information on the Small Business Health Care Tax Credit, please visit www.irs.gov.
Chuck Williams is dean of the College of Business at Butler University. Bill Terando, associate accounting professor at the COB, contributed to this article. For more information on the College and its “real life, real business” approach to business education, visit www.ButlerRealBusiness.com or e-mail Chuck at firstname.lastname@example.org.
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