Small Business: Health Premium Tax Credit

by Steve Wilson on March 3, 2011 · 0 comments

in Health, Small Business, Tax

Obama’s controversial health care reform law, passed in March, helps small businesses enjoy some substantial credits for health insurance. And that means good news for you this tax season. Almost 84 percent of all small businesses in the country will be eligible to receive a tax credit to buy health care coverage for employees. That amounts to 4 million small businesses. The IRS is so excited about this they even put together a YouTube video.

IRS speaks on Health Care Tax Credit


If you are a small business owner that offers group health insurance to your employees, the government wants to reward your good behavior and encourage more employers to do the same by giving tax credits to those who pay at least half of their employees’ group health coverage. Eligible businesses are those that have fewer than 25 full-time employees making less than $50,000 a year. To get the maximum credit, your business needs to be made up of 10 or fewer full-time employees with an average income of $25,000 or less. Here is the official worksheet from the IRS.

To qualify, a small business must:

  • Have fewer than 25 full-time equivalent employees
  • Pay average annual wages below $50,000 per FTE
  • Contribute at least 50% of each employee’s premium

Of Special Note: Owners are excluded, and should not be counted in number of employees, wages, or premium contribution amount. Tax credits can’t be larger than actual income tax liability.

Eligibility Rules
  • Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.

  • Firm size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).

  • Average annual wage. A qualifying employer must pay average annual wages below $50,000.

  • Both taxable (for profit) and tax-exempt firms qualify.

Amount of Credit
  • Maximum Amount. The credit is worth up to 35 percent of a small business’ premium costs in 2010 (25% for tax-exempt employers). On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers). 
    Phase-out. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

We have incuded a calculator to help give a more complete estimate and here are the details on how to calculate the credit:

1. Count your full-time equivalents (FTEs):
For each employee who worked 2,080 hours in the year or more, count that as 1 FTE. For employees who worked less than 2,080 hours, add up all their hours, divide by 2,080, and round down to the nearest whole number to get an FTE number for part-time employees. Now add these two numbers together. Don’t count owners, family members, or seasonal workers who work fewer than 120 days out of the year. Enter your FTE number in the first box in the calculator.

2. Calculate your average employee wages:
Add up total wages for all employees counted in your FTE calculation (both full-time and part-time). Divide this amount by the FTE number you calculated in step 1 and round down to the nearest $1,000. Enter your average wages number in the second box in the calculator.
3. Determine your qualified expenses :
Determine your total premium contributions for employees counted in the FTE calculation, verify that you are paying at least 50 percent of total premiums, and if so enter your premium contribution amount in the third box in the calculator.


The calculator will then calculate your estimated credit amount (if the calculator estimates that you will not qualify for a credit, it will display “N/A”).

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