Small Business Health Care Tax Credit 2014

Article written by EricBank

One of the features of the new health insurance landscape is a tax credit for small businesses to offset part of the costs of employee coverage. The amount of the credit has increased in 2014 to 50 percent of the premiums that a small business employer pays. The credit also increases to 35 percent for small tax-exempt employers. Eligible employers can receive the credit for two consecutive years.

Qualified Health Plans

To be eligible for the credit, the employer must pay premiums for employees enrolled through the Small Business Health Options Program Marketplace, although certain exceptions apply. For example, if you pay $50,000 a year for employee premiums and receive the maximum credit, you cut your tax bill -- or increase your refund -- by $25,000. The refund is limited by the total of your income tax withholding and Medicare tax liability. If you forget to apply for the credit, you can file an amended return within three years of the original filing or two years after paying the tax, whichever is later. 

Eligibility Requirements

A business can claim the tax credit if it pays at least 50 percent of each employee's health insurance, not counting employees who are dependents or family members. The business must have fewer than 25 full-time-equivalent (FTE) employees with average wages below $50,800, although the math is a little tricky -- see example below. One FTE can be achieved by one full-time or two half-time employees. The credit works on a sliding scale such that the smallest businesses -- ones with 10 or fewer employees, get the biggest credit, on a percentage basis. For an employee count between 11 and 24, the credit is reduced by a fraction in which the numerator is the number of FTEs minus 10, and the denominator is 15. If the average annual FTE wages exceeds $25,000, the reducing fraction has the excess average wage in the numerator and $25,400 (for 2014) in the denominator. The final reduction is the sum of the employee count and employee average wage reductions, and could possibly wipe out the credit entirely.

Example Calculation

Imagine an employer in 2014 has 12 FTEs and average annual wage of $30,000. The employer shells out $96,000 to pay for qualified employee health insurance premiums. The starting credit is 50 percent of the premiums, or $48,000. The employee count reduction for employees in excess of 10 is (2/15 x $48,000) or $6,400. The average annual wage reduction is (($30,000 - $25,000) / $25,400) x $48,000, or $9,449. Therefore, the total credit is equal to $48,000 - $6,400 - $9,449, or $32,151.

Claiming the Credit

To receive the credit, you must complete IRS Form 8941, Credit for Small Employer Health Insurance Premiums. Include the tax credit in your general business credit when you file your business income tax return. You may be able to carry the credit back or forward. If you are a small tax-exempt organization qualifying for the credit, file IRS Form 990-T, Exempt Organization Business Income Tax Return -- even if you normally don't file this form -- to receive a refund.