Is your small business booming? If so, you may be considering offering your employees a group healthcare plan. A group healthcare plan ensures your great team stays healthy and happy as they continue to help the business succeed.
Unfortunately, it isn’t quite so simple. Many small businesses have a much harder time than larger businesses providing healthcare plans for their employees.
This is generally due to three significant disadvantages small businesses face. First, with fewer people to pool the risk, the staff may be more expensive to insure as a group. Additionally, small businesses often have higher administrative costs. And finally, small business premiums are more variable and unpredictable and can, in some cases, become excessively expensive.
However, some good news for qualifying small businesses is that the small business healthcare tax credit can help.
Read on to learn more about the small business healthcare tax credit, including what it is, how it works, whether or not your small business may qualify, and how to claim the 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.
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:
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.
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.
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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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.
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