We have all been attentive and possibly emotionally involved in the health care reform debate. This has been an issue that has created much controversy and division amongst our nation. However, now that it has been signed into law, there comes some possible help for small business owners.
Part of the new health care reform legislation is the Patient Protection and Affordable Care Act, also referred to as the Small Business Health Care Tax Credit. The legislation provides for a new tax credit that is designed to help small businesses and non-profits offset the cost of providing healthcare for their employees.
The credit is available for small businesses and nonprofits that cover at least half of their employee’s health care costs and employ less than 25 FTEs earning less than an average of $50,000. Many businesses may quality if they employ more than 25 employees and if their employee base includes part-time or half-time employees that total less than 25 FTEs.
“This credit provides a real boost to eligible small businesses by helping them afford health coverage for their employees,” said IRS Commissioner Doug Shulman. “We urge small businesses and tax-exempt employers to look closely at this important tax break – which is already effective – to see if they qualify.”
This tax credit is specifically targeted at businesses that employ low to moderate income employees. This new tax credit may be claimed on 2010 tax returns that are filed in 2011.
To Qualify
- Employer must cover at least 50% of the cost of health coverage for its workers;
- The employer must employ less than 25 full-time employees or less than 50 part-time employees who work 20 hours or less;
- Employer must pay average wages that are below $50,000;
- Both for-profit and non-profit employers can qualify.
Amount of Tax Credit
- The tax credit can be as much as 35% of the business’ premium costs for 2010. In 2014 this amount will increase to 50% (35% for tax exempt employers).
- The tax credit will gradually phase out for employers with wage averages that are between $25,000 and $50,000 per year and for employers with between 10 and 25 FTEs.
To determine if your organization qualifies:
1. Figure out how many employees you have not counting owners or owner’s family members.
2. Calculate FTEs. You do this by adding full time employee hours (each full time employee equals 40 hours per week) plus part time employee hours.
3. Take total number of hours each employee works, add them together and divide by 2080. (Note: 2080 hours is what a 40 hour employee works in a year). This calculation gives you total FTEs.
4. Now add average annual wages for all employees and divide by your total FTEs. This number should be less than $50,000.
A Few Examples the IRS provides:
Example 1:
An Auto Repair Shop with 10 Employees Gets $24,500 Credit for 2010
Main Street Mechanic:
Employees: 10
Wages: $250,000 total or $25,000 per worker
Employee Health Care Costs: $70,000
2010 Tax Credit: $24,500 (35% credit)
2014 Tax Credit: $35,000 (50% credit)
Example 2:
Restaurant with 40 Part-Time Employees Gets $28,000 Credit for 2010
Downtown Diner:
Employees: 40 half-time employees (the equivalent of 20 full-time workers)
Wages: $500,000 total, or $25,000 per full-time equivalent worker
Employee Health Care Costs: $240,000
2010 Tax Credit: $28,000 (35% credit with phase-out)
2014 Tax Credit: $40,000 (50% credit with phase-out)
Example 3:
Foster Care Non-Profit with 9 Employees Gets $18,000 Credit for 2010
First Street Family Services.org:
Employees: 9
Wages: $198,000 total, or $22,000 per worker
Employee Health Care Costs: $72,000
2010 Tax Credit: $18,000 (25% credit)
2014 Tax Credit: $25,200 (35% credit)
This could be good news for struggling small businesses that already provide health care benefits to their employees. Please refer to the IRS website for additional information.
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