Health Insurance Tax Credit for Small Business

Small Business Owners may be able to claim a new credit on their 2010 tax returns if they pay employee insurance premiums in 2010.

The credit, available through the Patient Protection and Affordable Care Act, is intended to:

1.   Give small employers a tax break if they pay at least half the cost of single coverage for their employees on the group health plan.

2.   Encourage small employers to offer health insurance for the first time or maintain the coverage they currently have.

Who is eligible?

Employers with fewer than 25 full-time employees for the tax year and less than $50,000 in average annual wages per full-time employee, may be eligible for the tax credit if the employer pays at least 50 percent of the premium cost of health insurance coverage. Additional requirements and rules apply. Refer to the IRS website for more information. The IRS has also issued a “Three Simple Steps” guide to assist employers in determining their eligibility.

How much is the credit?

To achieve the maximum credit of 35 percent of employer-paid premiums paid in 2010 through 2013, an employer must have 10 or fewer full-time employees with an average annual full-time-equivalent wage of $25,000 or less. Those employers who employ between 11 and 25 full-time employees and/or with average wages in excess of $25,000 but less than $50,000 may still qualify for a lesser credit. Different credit amounts apply to tax-exempt small businesses.

How will the credit change in 2014?

Beginning in 2014, the tax credit increases to a maximum of 50 percent and is available for the two-consecutive-taxable year period beginning with the first taxable year in which the employer offers a qualified health plan to its employees through an exchange.

How are business owners (and their family members) who are employees counted?

Business owners and their family members are not counted when determining the number of full-time employees, the amount of average annual wages or premiums paid with respect to the credit. See the IRS website for further information including a description of a “business owner” and “family member.”

How does this affect payment of health insurance premiums?

It doesn’t. The credit is claimed on the employer’s tax return. The employer must pay the premiums during the year and claim the credit on his/her annual income tax return.

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