Health Care Tax Credits and Your Small Business.

· Are you a small business owner with less than 25 full-time equivalent employees?

· Do you pay an average wage of less than $50,000 per year?

· Do you pay for at least 50 percent of your employee’s health care coverage costs?


The Small Business Health Care Tax Credit may be an option for your company. Originated as part of the Health Care Reform Act in March 2010, small business owners are encouraged to offer their full-time employees health care coverage. As part of this push to provide workers with affordable healthcare coverage, a tax credit was included in the Health Care Reform Act to help defray a portion of the costs associated. Beginning in tax year 2010 and extending through 2013, the maximum credit is 35 percent of the average premium* for small business employers and 25 percent for small tax-exempt employers such as nonprofit charities. The Health Care Reform Act provided for a graduating increase in the tax credit beginning in 2014 expanding it to 50 and 35 percent, respectively.


If your small business isn’t making a significant profit for the 2011 tax year, don’t fret. The health care tax credit is eligible to be carried forward up to 20 years or backward five years to a time when your small business may owe more taxes. Since the total amount of health insurance premium payments will exceed the amount of the tax credit, small business owners can claim both the expense deduction for the health premium in excess of the credit along with receiving the tax credit. Lastly, the credit is also refundable, which can mean tax money returned to you in the form of a rebate check. If your small business had no taxable income for a qualifying tax year, you may be able to receive a refund so long as it does not “exceed your income tax withholding and Medicare tax liability.”


Find Your Total FTEs

To calculate your company’s total number of qualifying full time employees (FTEs), divide the total hours of service for which you pay wages to the employees during the year (not to exceed 2,080 hours for any employee) by 2. The resulting number (if not a whole number) is rounded to the next lowest whole number. To claim the Small Business Health Care tax credit, use Form 8941 to show the calculation of the credit and include it with your annual income tax return.


Seasonal Workers

Unfortunately, if you operate a seasonal business, such as an ice cream stand or a holiday shop at the mall, your business will most likely not qualify for the health care tax credit. However, if the seasonal worker is employed for more than 120 days during the tax year, s/he may become a qualifying worker. If your company pays health care premiums on behalf of seasonal workers, you may count those payments to determine the amount of your employer tax credit.


Ownership doesn’t count.

As a sole proprietor, partner in a partnership or as a shareholder owning more than 2 percent of an S corporation or an owner of 5 percent or more of other business types cannot be considered employees for the purposes of claiming the health care reform tax credit. Therefore, your wages or hours of employment cannot be used in calculating FTEs, premiums paid or average annual wages. Additionally, family members of the business owner(s) as a general rule cannot be included in the calculations either.


As with any tax deduction, it’s always smart to talk with your bookkeeper, small business accountant or tax professional to evaluate your situation and determine the best options.


* The average premium is determined by the Department of Health and Human Services and can be found by checking the web site for the average premium in the small group market in each state for the applicable tax year.


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