What is the Small Business Healthcare Tax Credit?

Suppose you’re an eligible small employer who provides healthcare coverage. In that case, the Small Business Healthcare Tax Credit can be a valuable way to offset some premium costs and put money back in your pocket.

The credit can reduce the amount of taxes you accrue by offering health insurance for the first time from Healthcare.gov’s Small Business Health Options Program (SHOP). Your savings could be as much as 50% of the cost of premiums for small businesses or up to 35% for small, tax-exempt employers.

There is a caveat: this is not a credit you can claim indefinitely. If your business is eligible, you can claim the Small Business Healthcare Tax Credit for two years in a row — and that’s all.

To put it another way, the tax credit gives your business some wiggle room as you work to determine how to fit the cost of offering insurance into your budget.

Who qualifies for the credit?

In order to be eligible for the Small Business Healthcare Tax Credit, you must meet three requirements as outlined by the IRS:

1) You must pay at least 50% of the employee insurance premiums at the single coverage rate.

This percentage applies to employee-only premium costs and does not apply to dependents. If you offer a family plan, you can contribute less than 50% and still claim for those contributions.

Contribute less than 50% to provide coverage to an employee’s family; you can still claim for those contributions.

It would be best if you also acquired your qualified health plan from the Small Business Health Options Marketplace (SHOP) to be eligible for the credit.

2) You must have fewer than 25 full-time equivalent (FTE) employees.

To qualify for the maximum credit, you must employ no more than 10 FTE employees. While the credit reduces between 10 and 25 employees, employing over 25 FTEs will cause the credit to reduce all the way to zero. This number includes all employees who perform services throughout the year.

There are some exclusions, including:

  • Owner of a sole proprietorship
  • Partner in a proprietorship
  • A shareholder who owns more than 2% of an S corporation
  • A shareholder who owns more than 5% of a C corporation
  • A person who owns more than 5% of the capital or profits of any other business that is not a corporation
  • Family members or a member of the household who qualifies as a dependent of any of the above people.

When figuring this credit, you do not count hours, wages, and premiums paid for excluded employees.

Similarly, seasonal employees (such as retail workers employed exclusively during the holiday season) who work 120 days or fewer during the tax year are not considered employees in determining FTEs and average annual wages. However, premiums paid on their behalf are still counted.

To determine your number of FTEs, divide the total hours of service for which you paid wages to employees during the year (but not more than 2,080 hours for any employee) by 2,080.

3) You must pay an average salary of less than $57,400 (2022).

This government indexes this rate for inflation, and so it may change year to year, but if your average wages paid per employee are less than this amount, you may be eligible for the tax credit.

It’s worth noting that the full 50% credit is for FTE employees with an annual income of $28,700. As a given employee’s income increases, the percentage credit decreases.

To determine your average annual wage, divide your total annual wages by the number of FTEs you employ.

How much is the small business healthcare tax credit?

Calculating the credit for your business is no simple matter, but it may be worth the effort; it could mean a significant reduction in tax liability for some businesses.

As mentioned above, small businesses that employ fewer than ten employees, and at an average annual income of $28,700 or less per employee will reap the maximum benefit of the credit. Above that threshold, the credit value decreases incrementally up to 25 employees, after which point your business no longer qualifies.

There are other limitations, such as the average premiums in your small group market, as published by the Department of Health. Additionally, there are limits on what premiums you may count in certain situations.

An employer must compare the actual premiums paid against the average premium table provided by HHS for their rating area and use the lesser of the two amounts.

If an employer pays only a percentage of the premiums and employees to pay the rest, the amount compared against the average premium is the percentage paid by the employer. For example, suppose an employer pays 80% of the premiums and employees to have the other 20% taken out of their pay. In that case, the IRS will compare the 80% paid by the employee against 80% of the amount listed in the average premium table. They will then use the lesser amount in calculating the credit.

How do you claim?

Suppose you are a qualifying employer (but not a tax-exempt employer). In that case, you can claim the credit on the employer’s annual income tax return with an attached Form 8941, Credit for Small Employer Health Insurance Premiums, showing the credit calculation.

Suppose you are a tax-exempt employer, as described in section 501(c) and exempt from tax under section 501(a). In that case, you may claim the credit by filing Form 990-T, Exempt Organization Business Income Tax Return, with an attached Form 8941 showing your calculation.

Finally, it’s worth noting that this tax credit will impact your eligibility for any healthcare-related tax deductions. You can still take both a deduction and receive the credit simultaneously. However, the deduction will be reduced for the two years you claim the Small Business Healthcare Tax Credit. You’ll subtract the amount you claim in the credit from what you claim as a deduction for that period.

After the two years are up, you can go back to claiming your full deduction again.

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