Health Care Tax Credit for Small Employers

If your business is one of millions of small employers, it may be eligible for the new tax credit for employee provided health care insurance.

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Millions of small employers received postcards from the IRS beginning in April 2010 that alerted them to the new small business health care tax credit and encouraged them to check their eligibility.  Even if a business did not receive a postcard, it still may be eligible.

Eligibility Rules

  • Providing health care coverage.  A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.
  • Firm size.  A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
  • Average annual wage.  A qualifying employer must pay average annual wages below $50,000 (owners’ wages are not included in the calculation).
  • Both taxable and tax-exempt entities qualify.

Amount of Credit

  • Maximum Amount.  The credit is worth up to 35 percent of premium costs in 2010 (25% for tax-exempt employers).  On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers).
  • Phase-out.  The credit phases out gradually for employers with average wages between $25,000 and $50,000, and for employers with the equivalent of between 10 and 25 full-time workers.

Claiming the Credit

Small employers, whether businesses or tax-exempt organizations, will use new Form 8941 (Credit for Small Employer Health Insurance Premiums), to calculate the small business health care tax credit.  Small businesses will include the amount of the credit as part of the general business credit on their income tax returns.

Tax-exempt organizations will include the amount of the credit on Line 44f of revised Form 990-T (Exempt Organization Business Income Tax Return).  Form 990-T (draft available for viewing) will be revised for the 2011 filing season to enable eligible tax-exempt organizations –– even those that owe no tax on unrelated business income –– to claim the small business health care tax credit.