Small Business Tax Credit

August 2, 2010

Did your small business receive a postcard from the IRS in April telling you that you might be eligible for an income tax credit for providing health insurance to your employees?  Millions of small employers received this postcard sparking an interest to save money on health insurance almost immediately.  But to whom does it apply?  What are the criteria to receive the credit?  How much money will the credit really amount?  These and other questions surrounded the credit.

 

The maximum credit will go to employers with less than 10 employees who make less than $25,000 each.  However, all small employers with less than 25 full-time equivalent employees with average annual wages of less than $50,000 may be eligible for this credit to some extent.  Full-time equivalent employees are calculated by dividing total employee hours paid by the employer by 2,080 (but not more than 2,080 per any employee).  The result, if not a whole number, is then rounded to the next lowest whole number.  A sole proprietor, a partner in a partnership, a shareholder owning more than 2% of an S corporation, and any greater than 5% owner of other businesses are not considered employees for purposes of this credit and should not be included in the calculation.  Also, the family members of these owners do not count as employees.  The credit phases out gradually for companies with full-time equivalent employees between 10 and 25 or for average wages between $25,000 and $50,000.

 

Starting for tax years beginning in 2010 through 2013, the maximum credit is 35% of the employer paid premiums.  These premiums must be paid under a "qualifying arrangement."  A qualifying arrangement means that the employer must pay a uniform percentage (not less than 50%) of the premium cost of the coverage.  The premium amounts are capped based on the average premium for the small group market in the state in which the employer offers coverage. 

 

The credit is refundable for tax-exempt employers meaning that even businesses without income tax liability can receive the credit. Otherwise, it is treated as a general business credit.

 

Finally, the credit is available for non-profit entities.  For tax years beginning in 2010 through 2013, the credit for a tax-exempt qualified employer is 25% of the employer's premiums paid under a qualified arrangement.  The credit cannot exceed the amount of income and Medicare tax the employer is required to withhold from employees' wages and the employer share of Medicare tax on employees' wages.

 

If you have any questions regarding the credit and its application to your business, please contact your 415 Advisor at (330) 492-0094.

by: Laurel L. Lusk, CPA

 

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