Denice R. Preston
You have a lot of decisions to make as a small business owner regarding employee benefits. Offering the right perks can encourage experienced candidates to apply for a job while encouraging existing employees to stay longer with your company.
Health coverage is one of the most important benefits for employees to consider. If you are worried about the costs, you can get a tax credit if your organization or business qualifies. You need to understand the recognition that can help you offset the costs of providing health insurance for your employees. It’s available to all small tax-exempt organizations.
What is the Small Business Health Care Tax Credit (SBHCTC)?
Some provisions of the Affordable Health Care Act only apply to small businesses. For example, the Small Business Health Options Program offers employers with fewer than fifty employees unique insurance options.
This credit is available to employers with at most 25 workers. The distinction is calculated on a sliding scale based on employer size. The tax credit is reduced the more significant the employer and vice versa. Credits are limited to 50% of the premiums for small employers and 35% for tax-exempt employers.
Small businesses eligible for the credit can claim it twice in a row. The credit can be carried forward or backward if you own a small business and do not owe any tax in a given year. You can claim the excess of your employer’s health care premiums paid over and above the credit.
You must complete Internal Revenue Service Form 8941 to claim your tax credit.
Who is eligible for the Small Business Health Care Tax Credit
The IRS states that an employer with less than 25 full-time equivalents (FTE) workers qualifies for a small business health insurance tax credit if they do all three of the following:
Minimum wage of $56,000 per FTE (indexed annually to inflation beginning in 2014).
Offers qualified health plans to employees via the SHOP Marketplace. (There are a few exceptions to this rule).
Each employee pays at least half of the cost for the employee-only option.
The credit is based on a sliding scale based on employer size. Your maximum credit will be reduced if you have over ten full-time employees or the average salary is above $27,000 (adjusted annually for inflation).
The tax credit is also available to organizations that are exempt from paying taxes. The credit for tax-exempt businesses is refundable to your withholding Medicare taxes. Refunds for tax-exempt organizations are subject to Sequestration. This means that the current fiscal year’s sequestration rate will decrease the refund amount.
Calculating FTEs
For the tax credit, one FTE employee equals 2,080 hours a year. The ACA does not consider 30 hours per week as one FTE. A part-time employee is any number of employees who add up to 2,080 working hours in a year.
The calculation does not include hours worked over 2,080 per year by an employee. Seasonal employees who work less than 120 days in a year are also excluded from the calculation. The employer may include the premiums for health insurance paid to seasonal employees in the analysis.
These individuals should also be excluded when calculating the FTE employee credit and any premiums they may have received.
Owner of a sole proprietorship.
Partner in a partnership.
Shareholders of an S Corporation who own more than 2%.
Owner of more than 5% of a business.
Families of those 2.
Calculating Average Annual Earnings
Divide the total annual wage you pay all your eligible employees by your total number of FTE employees. This will give you your average yearly salary. For example, divide $240,000 by 10 to get a $24,000 average annual salary.
Maximum Premiums
The employer-paid premiums for the small business tax credit are limited to what would have been paid if the employer had paid the average dividend in the rating area for the small group market. The tax credit can only be used for the lower of the actual premiums that the employer paid or the average premium for the small-group market in the rating region where the employee enrolls.
Assume that an employer has a total of 10 employees. The employer pays 50% for employee-only plans and family options. Five employees have an employee-only project, totaling $4,000 for each. Five employees have a family plan, each with a premium full of $10,000. The total tips were $70,000 (5 x $4,000 + 5 x $10,000).
The employer paid half of this amount, resulting in a total premium of $35,000 (70,000 x 50%) on behalf of employees. The employer’s market for small groups had an average bonus of $6,000 for employee plans and $12,000 for family plans. The employer can use the entire amount of dividends paid by employees to calculate the tax credit because it paid less than the average in its area.
The Department of Health and Human Services publishes a yearly table of average premiums for a particular area.
The Bottom Line
Some small business owners believe that health insurance is out of their reach, even though it is attractive for current and prospective employees. The government offers incentives, such as the small-business healthcare tax credit, to bridge this gap and give more Americans access to decent healthcare. Look at the tax implications and see if they can benefit your small business.
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