Small Business Tax Credit

Small business owners need every tax credit that they can get.  One tax credit that you are likely entitled to but may not know about is the Small Business Health Insurance Premiums tax credit.

For tax years 2010 through 2013, the federal income tax credit was worth a maximum 35% of premiums paid by small business employers.

Starting in 2014, the federal income tax credit is worth a maximum 50% of premiums paid by small business employers.

 

There are a few qualifications that you must meet in order to claim this credit:

1. Starting in 2014, the premiums must be paid on a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace.
   
   In California, there are, currently, 6 health insurance companies that are available for year-round enrollment in the SHOP program.  To view the list of qualifying health insurance companies and the available plans, click here.
   
   
2. There must be fewer than 25 full-time equivalent employees.
   It is important to understand that this does not mean less than 25 employees.  The number of full-time equivalent employees is a calculated figure that is determined by taking the total number of hours worked by all non-owner employees and dividing that number by 2,080.  The resulting figure is then rounded down to the nearest whole number.
   
   For example, if you had 13 employees and they all worked for a total of 1,500 hours during the year, you would have 9 full-time equivalent employees (13 x 1,500 = 19,500; 19,500 / 2,080 = 9.38; 9.38 rounded down is 9).
   
   
3. The average wages must be less than $50,000.
   
   To determine this number, you divide the total wages of the non-owner employees by the number of full-time equivalent employees.
   
   For example, if you paid your employees a total of $390,000 during the year, you would have average wages per full-time equivalent employee of $43,333 ($390,000 / 9).
   
   
4. The health insurance premiums must be paid through a qualifying arrangement.
   To be considered a "qualifying arrangement", the employer must pay at least 50% of the single-coverage insurance for its employees.  The IRS has ruled that the employer does not have to pay for the premiums covering the employee's spouse or children.  Generally, an employer must pay a uniform percentage of the premium cost for each enrolled employee's health insurance coverage.  However, exceptions exist for businesses who utilize either composite billing (uniform premiums paid rather than a uniform percentage) or list billing (differences in premiums exist for each employee based upon age or other factors).

The maximum credit is for 50% of the premiums paid in 2014 (35% in prior years).  However, it may be less than 50% if: 1) there are more than 10 full-time equivalent employees; 2) the average wages exceeds $25,000; or 3) actual health insurance premiums exceed average premiums paid for health coverage in the employer's area.

This tax credit can be carried back or forward to other tax years. 

In addition to the tax credit, an employer is entitled to claim a deduction for the excess health insurance premiums.  For example, if an employer pays $10,000 in health insurance premiums and claims a $5,000 tax credit, the employer would be entitled to take a $5,000 deduction for the remaining health insurance premiums.

If you have any questions about the Small Business Health Insurance Premiums tax credit, or if you would need assistance in claiming this tax credit, please do not hesitate to contact me.

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