Don’t Forget About the Small Business Health Care Tax Credit

Posted by: Carrie Minnich

The IRS began sending out postcards in April 2010 to small employers notifying them of the new small business health care tax credit. The credit helps small businesses and tax-exempt organizations afford the cost of insurance for their employees.

To be eligible for the credit the employer must
• Pay at least 50% of the health insurance premiums for its employees (based on the single rate)
• Have less than 25 full-time equivalent employees
• Pay less than $50,000 in average annual wages

The maximum amount of the credit is 25% of the premium costs beginning in 2010 for tax-exempt employers and increases to 35% on January 1, 2014. The credit is phased out for organizations with average wages between $25,000 and $50,000 and with full-time equivalents between 10 and 25. For tax-exempt entities, the credit is also limited to the amount of the employer’s payroll taxes paid during the calendar year in which the tax-exempt entity’s tax year begins. Payroll taxes include the amount withheld from employee wages for income tax withholding and Medicare and the employer’s share of Medicare.

Form 8941, Credit for Small Employer Health Insurance Premiums must be filed to claim the credit. The amount of the credit from Form 8941 is then recorded on line 44(f) on Form 990-T, Exempt Organization Business Income Tax Return.

Are You Eligible?

1. Does your organization pay at least 50% of health insurance premiums for employees?
*If yes, continue to step 2.

2. Calculate the number of full-time equivalents.
Number of full-time employees (employees working at least 40 hours per week) _________
Number of full-time equivalents (total hours of part-time employees divided by 2,080 hours) _________
Total full-time equivalents _________
*If the total is less than 25 continue to step 3.

3. Calculate the average annual wages of employees.
Total annual wages paid to employees divided by the number of employees in step 1
*If the result is less than $50,000 then you may qualify for the tax credit.

After you have determined that you may qualify for the credit, use the information calculated above to complete Form 8941 or contact your tax advisor for assistance.