The Small Business Healthcare Tax Credit

The Small Business Healthcare Tax Credit was created by the Affordable Care Act to encourage small businesses to offer health insurance to their employees. If a small business or tax-exempt firm (for example, a charity) meets a number of qualifications, they are eligible to receive the federal tax credit for two consecutive taxable years. The credit can be worth up to 50% of the amount an employer pays toward their employee healthcare premiums.

Who Qualifies For The Small Business Healthcare Tax Credit?

A limited number of small businesses are eligible to receive the Small Business Healthcare Tax Credit and they must meet all of the following criteria: 

The business must have fewer than 25 full-time or equivalent (FTE) employees to qualify and the average employee salary must be $50,000 per year or less. Equivalent employees are defined as any number of part-time employees that work an aggregate number of hours equal to the number that of a full-time employee (30 hours or more). That means, for example, two part-time employees who each work 15 or more hours would count as one full-time employee toward the maximum 25.

The small business also must offer their health insurance plans through the Small Business Health Options Program, commonly called the “SHOP” Marketplace or exchange, to be eligible for the tax credit. Depending on the state where the business is primarily located, it might offer plans through the federal health insurance exchange and HealthCare.gov, or one of the independent state exchanges. Participating in the federal SHOP exchange versus one of the state exchanges does not impact the eligibility of a small business. 

An employer must pay at least 50% of each full-time employee’s premium cost to qualify for the tax credit. This requirement is in place to encourage small firms to pay for most or all of the cost of employee healthcare premiums. Generally, the smaller the company, the more impactful the cost of offering health insurance and covering the cost of premiums is to that business. To incentivize the very small firms, the tax credit is graded based on the number of employees and the average annual salary. 

A small employer that is tax-exempt and falls under Internal Revenue Service (IRS) section 501(c) also is eligible for the small business healthcare tax credit, assuming it meets the above qualifications. Generally, tax-exempt organizations that do not fall under section 501(c) are not eligible. However, tax-exempt farmer cooperatives subject to IRS section 1381 are able to claim the credit as a general business credit. The IRS has a more detailed list of organizations that might qualify in the tax form instructions detailed below.

Individuals Excluded From the Tax Credit

A number of individuals are not considered employees for the purpose of the small business healthcare tax credit. Their hours and wages should not be included when calculating the credit figure on the tax form explained below. Those individuals who are excluded are:

  • The owner of a sole proprietorship. This includes those who own 5% or more of a C-corporation and 2% or more of an S-corporation.
  • A partner in a partnership.
  • A shareholder who owns (after applying the section 318 constructive ownership rules) more than 2% of an S corporation.
  • A shareholder who owns (after applying the section 318 constructive ownership rules) more than 5% of the outstanding stock or stock possessing more than 5% of the total combined voting power of all stock of a corporation that is not an S corporation.
  • A person who owns more than 5% of the capital or profits interest in any other business that is not a corporation.
  • Family members or a member of the household who is not a family member but qualifies as a dependent on the individual income tax return of a person listed above. Spouses also are excluded.

How Much Is The Small Business Healthcare Tax Credit?

The Small Business Healthcare Tax Credit is graded, meaning that only the smallest businesses get the full tax credit. Small businesses with 10 or fewer full-time employees (or the equivalent) and average annual wages less than $25,000 receive the full credit tax credit: 50% of the contributions it makes to employee premiums. Other small businesses are credited a less competitive percentage based on the number of employees and their average annual salary.  

For example, say a firm qualifies for the full small business tax credit and chooses to pay for 100% of their employees’ premiums, which cost the firm $70,000 per year. That firm’s tax return would be credited $35,000 at the end of the year.

Claiming The Small Business Healthcare Tax Credit

Claiming the small business healthcare tax credit is not difficult. Small businesses and tax-exempt organizations that meet the above qualifications only need to complete a Form 8941. The form calculates the dollar amount the small business expects to be credited and is submitted with the other tax forms required of a small business. In addition to submitting the Form 8941, small businesses should also record the expected credited amount as part of their general business credit on their income tax form, according to the IRS. Small businesses with any questions about the form can reference the Form 8941 instructions the IRS publishes online. There, small businesses can find explicit detail and explanations of every line of the Form 8941. 

Tax-exempt organizations also need to fill out the Form 8941 to calculate their expected tax credit. Then, they need to include the expected amount on line 44f of the Form 990-T, the Exempt Organization Business Income Tax Return. The Form 990-T must be filed to receive the credit, even if the business does not typically file that form.

Some small businesses are eligible to carry the credit back or forward. Tax-exempt employers might be eligible for a refundable credit, meaning the credit can reduce an organization’s tax liability below zero and they might be entitled to a refund. 

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