The Small Business Health Care Tax Credit is part of the Affordable Care Act, and encourages small businesses and tax-exempt organizations to offer a particular type of health insurance coverage to their employees, with a reward in the form of a tax credit for the company.
The IRS defines small companies or businesses as those that:
- Have fewer than 25 full-time employees
- Pay an average salary of less than $50,000/year per employee
- Pay at least half of employee health insurance premiums
However, even if a business meets these requirements, the company will only be eligible for the tax credit if the health coverage is purchased through SHOP (the Small Business Health Options Program).
Currently, small businesses can receive a maximum credit of up to 50% of premiums paid, and small tax-exempt employers can receive a maximum credit of 35% of premiums paid. The credit is only available to eligible employers for two consecutive years, but can be applied retroactively, or carried forward, to other tax years.
Let’s take a look at this practically: If an employer pays $20,000 a year in employee health care premiums, and he qualifies for a 50% credit, he will end up saving a whopping $10,000. And if he receives the credit two years in a row, that’s $20,000! For small businesses, this amount of money can be the difference between going bankrupt and staying afloat.
How is the Amount of the Tax Credit Determined?
The amount of the credit that small businesses receive goes according to a sliding scale. The general rule is: the smaller the business, the bigger the credit. You won’t know the full amount you are entitled to until you apply.
How to Apply for the Credit
Small businesses can apply for the Small Business Health Care Tax Credit by filing Form 8941 and including the amount on their yearly tax return. Tax-exempt organizations should file Form 990-T with an attached Form 8941 that shows the calculation of the credit.
Are You Eligible?
Before applying, employers must first determine whether they meet the IRS’ criteria: Do they have 50 full-time employees? (Two part-time employees count as one full-time employee, so if you have 25 part-time employees, you wouldn’t qualify.) Does the average wage come out to below $50,000 a year? And do you pay at least 50% of your employees’ health insurance premiums?
Remember, it is important to make sure all the information you file is correct so that you receive the maximum credit, which can significantly improve your company’s bottom line. If you would like assistance in determining whether you are eligible for the Small Business Health Care Tax Credit, contact the experts at Corporate Financial today.