How to Claim the Small Business Health Care Tax Credit
Posted on July 24, 2013
Many questions are swirling around the implementation of the Affordable Care Act. However, there is good news for smaller organizations—the Small Business Health Care Tax Credit.
This tax credit is designed to help small employers provide health insurance to their employees. The credit can account for up to 35% of small employers’ share of their employees’ health care premiums, or 25% if the employer is tax-exempt. These percentages will increase to 50% and 35% respectively on January 1, 2014.
Requirements to qualify
To qualify for the Small Business Health Care Tax Credit, small employers must satisfy three requirements:
# Employers must have fewer than 25 full-time equivalent employees
during the tax year. However, the tax credit may be claimed even if
there are more than 25 physical employees, depending upon the amount of
time they work.
# Employers must pay an average annual wage of less than $50,000 per full time employee.
# Employers must pay at least half of employee health insurance premiums.
If employers satisfy these requirements, the Small Business Health Care Tax Credit is an opportunity to put money in their pockets. The requirements seem simple enough, but some parts require some clarification.
Clarifying the requirements
First, “full-time equivalent employees” is a term that needs to be carefully explained. For the purposes of this tax credit, full-time employees are those who work at least 40 hours a week. Each of these employees is considered one full time employee, counting toward the allowed 25. However, two part-time employees who work 20 hours each week count together as one full-time employee who works 40 hours a week.
An example: Bob’s Car Wash has 14 employees that work 40 hours a week and 20 employees that work 20 hours a week. Although they employ 34 people, Bob’s still qualifies for the Small Business Health Care Tax Credit. This is because their 20 employees who work 20 hours are the equivalent of 10 employees who work 40 hours, bringing Bob’s total full-time employee count to 24.
Second, it is important to define average annual wage per full-time employee. To figure this number, employers must calculate their total annual wages and divide it by their previously-calculated number of full-time employees.
It is important to remember we are talking about full-time employees (of which we calculated Bob’s Car Wash has 24). Dividing Bob’s $1.5 million in annual wages among his 24 full time employees, the average wage per employee comes out to be $62,500 per employee—which means his business does not qualify.
Third, employers must pay at least half of employee insurance premiums at the single (employee-only) coverage rate. Bob's Car Wash meets this requirement because they pay more than half of the employee premium.
Helping your clients apply
A check in all three of these boxes equals an opportunity to claim. Your smaller clients may be looking to claim this tax credit, so make sure you ask them to provide the following information:
# Hours worked per employee
# Weeks worked per employee
# Days worked per employee
# Type of insurance coverage
# Percent of premiums paid by employer
# Gross wages per employee
# Whether employee meets seasonal rules test