Claiming the Small Business Health Care Tax Credit

If you’re a small business owner with fewer than 25 full-time equivalent employees you may be eligible for the small business health care credit.

What is the Small Business Health Care Credit?

The small business health care tax credit, part of the Patient Protection and Affordable Care Act enacted in 2010, is specifically targeted to help small businesses and tax-exempt organizations provide health insurance for their employees through their state’s Small Business Health Options Program (SHOP) Exchange. Exceptions apply where SHOP Exchange coverage is not available to the employer. Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for this credit. Household employers not engaged in a trade or business also qualify. After 2013, the credit may be claimed only in two consecutive tax years.

How Does the Credit Save Me Money?

The tax credit is worth up to 50 percent of your contribution toward employees’ premium costs (up to 35 percent for tax-exempt employers). The tax credit is highest for companies with fewer than 10 employees who are paid an average of $25,900 or less in 2016 ($26,200 in 2017). The smaller the business, the bigger the credit percentage is.

If you pay $50,000 a year toward workers’ health care premiums–and you qualify for a 15 percent credit–you’ll save $7,500. And, if in 2017, you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $10,000 a year.

Is My Business Eligible for the Credit?

To be eligible for the credit, you must cover at least 50 percent of the cost of single (not family) health care coverage obtained through a SHOP Exchange for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs) and those employees must have average wages of less than $51,800 a year in 2016 or $52,400 a year in 2017.

Let’s take a closer look at what this means. A full-time equivalent employee is defined as either one full-time employee or two half-time employees. In other words, two half-time workers count as one full-timer or one full-time equivalent. Here is another example: 20 half-time employees are equivalent to 10 full-time workers. That makes the number of FTEs 10, not 20.

Now let’s talk about average wages. Say you pay total wages of $200,000 and have 10 FTEs. To figure average wages you divide $200,000 by 10–the number of FTEs–and the result is your average wage. In this example, the average wage would be $20,000.

Can Tax-Exempt Employers Claim the Credit?

Yes. The credit is refundable for small tax-exempt employers too, so even if you have no taxable income, you may be eligible to receive the credit as a refund as long as it does not exceed your income tax withholding and Medicare tax liability (employer’s and employee’s share).

Can I Still Claim the Credit Even If I Don’t Owe Any Tax This Year?

If you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit.

Can I File an Amended Return and Claim the Credit for Previous Tax Years?

If you can benefit from the credit this year but forgot to claim it on your tax return there’s still time to file an amended return.

Businesses that have already filed and later find that they qualified in 2014 or 2015 can still claim the credit by filing an amended return for one or both years. Of course, since the credit can only be claimed in two consecutive years after 2013, the credit will no longer be available for 2016 forward.

Don’t hesitate to call us, if you have any questions about the small business health care credit.