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Small Business Tax Credit

Many small businesses are eligible for financial assistance from the federal government to help pay for their employee’s health insurance premiums. This financial assistance is known as the Small Employer Health Insurance Tax Credit. Through 2013, eligible for-profit businesses can claim a credit of up to 35% of their health insurance expenses, an amount that increases to a 50% credit in 2014. Tax-exempt organizations such as charities are also eligible and may receive a 25% credit, which would increase to 35% in 2014. The tax credit favors the smallest businesses. If you have more than 10 employees or your average salary is more than $25,000 the credit is determined according to a sliding scale.

Tax Credit Eligibility

The Council of Economic Advisors estimates that 4 million small businesses may be eligible for the credit if they provide health coverage to their workers. Eligible businesses must:

  • Employ less than 25 full-time employees (or the equivalent)
  • Pay their employees an average wage of less than $50,000 per year
  • Pay at least half of their employees’ single (not family) health care premiums

One of the areas of confusion for business owners is the notion of ‘equivalent’ full time employees. Imagine your company has 10 employees working 40 hours a week and another 10 part-time employees working 20 hours a week. The IRS would view your company as having the equivalent of 15 full-time employees. The 10 part-time employees hours were the equivalent of 5 full-time employees and added to the existing 10 full time employees, there is the equivalent of 15 full-time employees.

With respect to average wages, you merely take your annual sum of all wages and divide it by the number of workers you employ. For example, if you pay $400,000 in annual wages for all employees and then are ten employees, the average wage is $40,000.

Claiming the Small Business Tax Credit

The actual amount a business can claim in credit varies depending on how much the business pays in insurance premiums, how many employees they have, and how much they pay those employees annually. By using IRS form 8941, the Credit for Small Employer Health Insurance Premiums, you can calculate the amount of your tax credit for providing health insurance coverage within your qualifying small business.

If your company did not owe taxes for the current year, the tax credit for which you qualified may be applied to a prior tax year or a future tax year. Additionally, if your company qualifies for the tax credit, those health insurance premiums paid beyond the tax credit may be claimed as a business expense deduction. If your small business has no taxable income, the credit may be received as a refund.


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