Health Care Tax Credit for Small Businesses!

  Since the enactment of federal health care reform, hundreds of thousands of small business owners across the country have been able to claim a tax credit for offering their employees health benefits -- and millions more are eligible, according to a report released today by advocacy group Small Business Majority and consumer group Families USA. For tax year 2011, seven in 10 small businesses with 25 or fewer employees are eligible for the credit.

  But most striking is that the majority of entrepreneurs don't even know this credit exists.

American small businesses employ millions of workers and create 65 percent of all net new jobs. They can be found in every pocket of the country, driving growth in metropolitan cities, suburban settings and rural towns. Small businesses hold an iconic position in the American consciousness -- a position that sometimes makes it easy to forget how much they struggle to achieve that deserved recognition.

The reality is, most small businesses operate within thin profit margins. And that means they're less likely than big businesses to be able to afford health coverage for their workers. It's a decades-old problem that the Affordable Care Act was designed specifically to address. According to the report released today, more than 3.2 million small businesses employing 19.3 million Americans are eligible for the healthcare tax credit included in the law to help offset their premiums. Erica Hawthorne, the marketing manager for Ken Weinstein's Philadelphia, Penn. Trolley Car Diner, is one of those 19.3 million.

  Erica reports that Ken received a tax credit of 19 percent of his premiums, and that she has directly benefited. After being on an individual plan, Erica was able to gain better insurance when Ken decided to expand employee coverage after receiving the credit. "Offering employee health benefits has helped the business attract and retain staff," Erica said. "When I was able to switch over to the group plan, I saw a significant change in my premiums. It really increased my take-home pay. From an employee perspective, offering health insurance adds to the entire package of any job. It's mutually beneficial for a business and its employees."

Entrepreneurs like Ken are using their tax credit savings t0 boost benefits, hire new workers and more. With $15.4 billion available for this year's credits alone, eligible small business owners and their employees stand to reap big savings. That $15.4 billion amounts to an average of $800 per employee, or $1,066 at businesses that qualify for the maximum credit of 35 percent of their 2011 premium costs.

  According to the report, two in five eligible businesses should qualify for the 35 percent maximum (which in 2014 will jump to 50 percent). Those who think they might be eligible should talk to their accountants, but to meet basic qualifications, owners must have fewer than 25 full-time employees and pay at least 50 percent of their premiums.

  Unfortunately, not nearly as many employers who are eligible for this benefit have taken advantage of it. This is largely due to small business owners' overall unfamiliarity with this provision of the Affordable Care Act. Our national opinion polling found 57 percent of small business owners have never heard of the tax credit. For the sake of these small businesses, it's imperative lawmakers and small business groups spread the word about this and other provisions in the law that will help boost entrepreneurs' bottom lines. These individuals -- the cornerstone of state and local economies -- are doing everything they can to build up their companies right when our nation needs it most.

What You Need to Know about the Small Business Health Care Tax Credit

How will the credit make a difference for you?                 

For tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities. An enhanced version of the credit will be effective beginning Jan. 1, 2014. Additional information about the enhanced version will be added to IRS.gov as it becomes available. In general, on Jan. 1, 2014, the rate will increase to 50 percent and 35 percent, respectively.

Here’s what this means for you. If you pay $50,000 a year toward workers’ health care premiums – and if you qualify for a 15 percent credit, you save … $7,500. If you save $7,500 a year from tax year 2010 through 2013, that’s total savings of $30,000. If, in 2014, you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $12,000 a year.

Even if you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.

There is good news for small tax-exempt employers too. The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability.

And finally, if you can benefit from the credit this year but forgot to claim it on your tax return there’s still time to file an amended return.

Click here if you want more examples of how the credit applies in different circumstances.

Can you claim the credit?

Now that you know how the credit can make a difference for your business, let’s determine if you can claim it.

To be eligible, you must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs). Those employees must have average wages of less than $50,000 a year.

Let us break it down for you even more.

You are probably wondering: what IS a full-time equivalent employee. Basically, two half-time workers count as one full-timer. Here is an example, 20 half-time employees are equivalent to 10 full-time workers. That makes the number of FTEs 10 not 20.

Now let’s talk about average wages. Say you pay total wages of $200,000 and have 10 FTEs. To figure average wages you divide $200,000 by 10 – the number of FTEs – and the result is your average wage. The average wage would be $20,000.

Also, the amount of the credit you receive works on a sliding scale. The smaller the business or charity, the bigger the credit. So if you have more than 10 FTEs or if the average wage is more than $25,000, the amount of the credit you receive will be less.

If you need assistance determining if your small business or tax exempt organization qualifies for the credit, try this step-by-step guide

How do you claim the credit?

You must use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit.

If you are a small business, include the amount as part of the general business credit on your income tax return.

If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don't ordinarily do so.

Don’t forget … if you are a small business employer you may be able to carry the credit back or forward. And if you are a tax-exempt employer, you may be eligible for a refundable credit.