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Small Business Health Insurance Tax Credit

The 2010 Health Care Act includes a tax credit for health care costs paid by certain small business employers for tax years beginning January 1, 2010.

There are a series of requirements for employers and covered contributions.

Employer Qualifications

Employers may qualify for a partial credit if they can meet the following test.

  • The employer must have fewer than 25 full-time equivalent eligible employees  excluding :
    • 2% shareholders in S-corporations,
    • 5% owners of an eligible small business,
    • Anyone who is a relation or dependent of these individuals
    • Seasonal workers working fewer than 121 days during the year

The employees' average annual full-time equivalent wages must not exceed $50,000.

For full credit, an employer must have 

  • 10 or fewer full-time equivalent employees
  • Who are paid average taxable wages of $25,000 or less

Credits are reduced between 10 and 25 employees.

Contributions

  • Employer contributions must be a uniform percentage of at least 50%
  • They are capped by the equivalent premium for the state (full details will be provided by the IRS.)

Once an employer meets the requirements above, their treatment depends on whether they are a for-profit or non-profit entity.

For-profit employers

The  maximum credit is up to 35% of qualified contributions to health insurance. If an employer paid 60% of premiums totaling $5,000, the maximum credit would be $1,050 ($5,000 x 60% = $3,000; 35% of $3,000 = $1,050).

For these employers, the credit is in the form of a non-refundable general business credit .  The credit  may generally be carried back for one year and carried forward for up to 20 years. 

Non-profit employers

The maximum credit is 25% of qualified premium contributions.

For non-profit organizations,  the credit is in the form of a reduction in the amounts of required  income and Medicare tax withholdings on wages and the employer’s share of Medicare tax on wages. 

Please contact us for full details and assistance determining if you are eligible for the credit.