What Small Business Healthcare Tax Credits Do You Qualify For?

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The Health Care Reform Bill includes a tax break for eligible small businesses who offer healthcare benefits to their employees.

You may be able to get back 35¢ for every $1 you spent if you meet ALL of the following requirements:

  • you have less than 25 full-time-equivalent employees (say, 50 half-timers)
  • their average compensation is less than $50,000 a year
  • you paid for at least half of their health insurance premiums

Now here’s where it gets tricky. The size of the tax credit decreases as your company’s average wage climbs from $25,000 to $50,000 and as your full-time-equivalents increase from 10 to 25. The highest rebate (35%) goes to 20 employees with an average employee income of $25,000. With 17 FTEs earning an average of $38,000, there’s no rebate. Are you confused? Join the crowd, but keep reading.

The government claims four million small businesses are eligible for the Small Business Health Care Tax Credit, but less than half of them will actually get a tax break, according to the The National Federation of Independent Businesses (NFIB). That’s partly because of the fade-out provision just explained, but also because no one knows how many of those 4 million businesses even offer healthcare benefits. Many of them don’t.

According to a recent Kaiser Family Foundation report only two thirds of companies with 3-199 workers offer healthcare benefits. The Affordable Care Act was designed to increase access to healthcare, but a Fidelity Investments survey three months ago found that 22 percent of small business owners actually intend to drop their health insurance benefits. And a McKinsey & Company survey suggested the drop-out rate will be closer to 30 percent.

The Census Bureau just reported that people who receive health insurance benefits through their employer dropped from 64.1 percent in 2000 to 55.3% in 2010. Nationwide, 16.3% of the population is uninsured, in part a reflection of the large number of unemployed who’ve lost their coverage.

Still, if your business is on the low end of the size and pay scale—the kind of business the rebate was intended to help—you can claim the credit for your healthcare premiums through 2013. And beginning in 2014, your maximum tax credit will increase from 35 percent to 50 percent.

Keep in mind that eligibility is based on full-time-equivalents, not your actual number of employees. So if you have a lot of part-time workers you may still qualify even if you have more than 25 workers.

Seasonal workers, unless they work for you more than 120 days a year, aren’t included as FTEs and don’t count in your average wage calculation.

Sorry to say, if you’re organized as a sole proprietor or partnership and don’t have any employees other than yourself or your family on the payroll, you don’t make the cut either.

If all this seems ridiculously complicated, don’t feel bad. CPAs and tax attorneys are scratching their heads too.

The National Federation of Independent Business (NFIB), however, has a slick Health Insurance Reform Tax Credit Calculator for Small Business that can help you get a handle of this issue. But even they have a disclaimer that says:

WARNING: This law is new and evolving. We (and everyone else) are just beginning to understand the thousands of complex provisions – including some associated with this credit. The calculations here will change if: (1) if the firm uses part-time employees, (2) if the owner and his or her family purchase their insurance separately, (3) if the firm has a mix of individual and family policies in its pool, and (4) if the Secretary of HHS determines that the company plan is more expensive than some "average" plan to be defined later. Also, the credit is neither refundable nor transferable, meaning it can only be used to offset actual tax liabilities.

Additional information about eligibility requirements can be found on the Small Business Health Care Tax Credit for Small Employers page of the IRS website.

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