For tax years beginning January 1, 2010, small businesses and tax-exempt organizations that provide health insurance coverage to employees qualify for a special tax credit, according to the Internal Revenue Service.
The new tax credit provided by Patient Protection and Affordable Care Act (PPACA) is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.
An eligible small employer (ESE) generally is an employer with less than 25 full-time equivalent employees (FTEs) whose average annual wages are less than $50,000. Due to the fact that the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers. The maximum credit goes to smaller employers with 10 or fewer FTEs paying annual average wages of $25,000 or less. Self-employed individuals, including partners and sole proprietors, 2 percent shareholder of an S Corporation, and 5 percent owners of the employer are not treated as employees for the purpose of this credit.
The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. In 2014, this maximum credit increases to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible employers that are tax–exempt organizations.
The following three steps determine if you qualify for the small business health care tax credit.
- Determine your total number of employees(not counting owners or family members):
Full-time employees: _________________________________________________
(Enter the number of employees who work at least 40 hours per week)
Full-time equivalent of part-time employees: ____________________________
(Calculate the number of full-time equivalents by dividing the total annual hours of part-time employees by 2080.)
= total employees
If the total number of employees is fewer than 25, go to step 2
- Calculate the average annual wages of employees(not counting owners or family members):
Take the total annual wages paid to employees: ________________________
Divide above wages by the total number of employees from step 1: _______________________
(Total wages divided by number of employees)
= average wages
- If the result is less than $50,000, and you pay at least half of the insurance premiums for the employees at the single (employee-only) coverage rate, then you qualify to claim the small business health care tax credit.
The credit is a general business credit, and can be carried back for one year and carried forward for 20 years. The credit is available to offset the regular tax liability as well as the alternative minimum tax.
If you have questions about the PPAC tax credit or to find out about your businesses’ eligibility please call ELLS CPAS 714.569.1000.