 |
|
 |
|
|
|
|
|
 |
|
|
|
|
|
Eligible for the New Small-Employer Health Care Credit?
David A. Stiefel, MBA, CPA/PFS
Principal, Tax Practice; Director of Closely Held + Family Business Services
April 6, 2010
Small employers simply pay more for health coverage than their large-company counterparts. It's a fact--their premiums are higher and they also pay more in administrative costs.
As a consequence, they're less likely to provide their employees with health insurance. Roughly half of all businesses with nine or fewer employees offer coverage while 98 percent of companies with 200 or more employees do. And the situation is worse for the self-employed. The numbers help to explain why so many of America's uninsured are actually employed.
The recently-enacted Patient Protection and Affordable Care Act attempts to level the playing field for smaller for-profit and not-for-profit employers and encourages them to provide--or continue providing--health insurance. "We urge small businesses and tax-exempt employers to look closely at this important tax break―which is already effective―to see if they qualify," said IRS Commissioner Shulman. According to Shulman, the new health insurance credit "provides a real boost to eligible small businesses by helping them afford health coverage for their employees."
When the Act is fully implemented in 2014, small businesses and the self-employed will be able to increase their insurance purchasing power through state-based insurance exchanges. In the interim, beginning with the 2010 tax year, certain small employers are eligible for a federal health insurance tax credit. The initial version of the credit is available for tax years beginning in 2010, 2011, 2012, or 2013.
The tax credit calculation is a fairly complex one. Generally, if you qualify for the maximum credit, your federal tax credit is equal to 35 percent of the amount you pay in health care premiums for your employees―25 percent if you're a tax-exempt organization.
If you're a for-profit business, you can apply the credit against your regular tax liability or alternative minimum tax (AMT) liability and can carry the credit back for one year and forward for 20 years.
If you're a tax-exempt organization, the credits are applied against certain payroll taxes. The procedure for calculating and claiming your credit hasn't been fully established.
Eligible Small Employers
The credit is only available to an eligible small employer, defined as an employer with no more than 25 full-time-equivalent employees during the tax year. In addition, the employees' average annual full-time equivalent wages cannot average more than $50,000.
The full amount of the credit is available to employers with no more than 10 full-time-equivalent employees with average annual full-time equivalent wages of less than $25,000. It phases out for slightly larger employers, up to the 25-employee and $50,000 average-wage limits.
Business owners―including sole proprietors, partners, over-two-percent S corporation shareholders and over-five-percent owners of any other business―and the members of their families and households―are not eligible. They are excluded from the employee calculations, and their wages and premiums are also excluded from the tax-credit calculations.
Also to qualify for the credit, your business or tax-exempt organization must make a nonelective contribution for each employee enrolled in your qualifying health insurance plan. Your contribution must be a uniform percentage that represents at least half of the cost of the premium―based on the single-employee rate, not the family rate.
The IRS website includes a graphic illustration of the general steps to determine if you qualify for the tax credit.
 Calculating Full-Time-Equivalent Employees
If some or all of your employees work less than full-time, you may have more actual employees than full-time-equivalent employees, which means you could still qualify for the credit with more than 25 employees.
To calculate the number of your full-time-equivalent employees, first calculate the total number of hours during the year for which you pay wages―limited to 2,080 hours per employee. If you employ seasonal workers, you cannot include them in your calculation unless they work for you more than 120 days during the year. You must also exclude the business' owners and their family members from the calculation.
Divide the total number of hours by 2,080 and round the result down to the next lowest whole number.
Calculating Average Annual Full-Time-Equivalent Wages
To calculate your average annual wages, first add up the total amount of the wages you paid to your employees during the year―using the FICA definition of wages but ignoring the wage base limitation. Once again, exclude seasonal workers unless they work for you more than 120 days during the year. You must also exclude the business' owners and their family members.
Divide the total wages by the number of your full-time-equivalent employees and round it down to the nearest $1,000.
Amount of the Credit
The premium payments that qualify for the credit are generally the premiums that you pay for your employees―excluding any employee contributions. However, those premium payments are compared against certain small-business benchmark premiums and, if lower, your portion of the benchmark premiums are used instead.
If you're a for-profit employer, your tax credit is generally equal to 35 percent of the qualifying employer-paid premiums. For tax-exempt employers, the credit is reduced to 25 percent.
Based on the size of your business, the actual amount of your credit is subject to a phase-out, as described below.
Credit Phase-Out Amounts
If the number of your full-time-equivalent employees exceed 10 or your average annual wages exceed $25,000, you'll need to reduce your basic tax credit amount by either―or both―of the following:
Full-time-equivalent employees greater than 10: Subtract 10 from the number of your full-time-equivalent employees, and divide by 15. Multiply the amount you initially calculated for your tax credit by the resulting fraction to calculate the reduction amount.
Average annual wages greater than $25,000: Subtract $25,000 from your average annual wages amount, and divide by $25,000. Multiply the amount you initially calculated for your tax credit by the resulting fraction to calculate the reduction amount.
|
|
|
|
|
|
|
|
|
|
|
|
|
