How the small-business health insurance credit works

Published 5:50 pm Tuesday, June 29, 2010

Over the past two columns, I focused on describing the health care law that was signed by President Barack Obama on March 23. One of the areas that I have received the most questions on is the ability for an employer to obtain a tax credit based on the health insurance premiums paid for its employees starting with their 2010 tax returns.

The aim of this provision of the Patient Protection and Affordable Care Act is to encourage small employers to provide health insurance to employees or to continue to provide health insurance for their employees.

The first word in the title is key; this credit is for small employers. The definition of a small employer is an employer with no more than 25 employees. The details are once again important to understand. To qualify for the full credit, you must have less than 10 full-time equivalent employees and the average wage must be under $25,000. If you have between 11 and 25 full-time equivalent employees and the average wage is under $50,000 you still can receive a partial tax credit.

Another hurdle to cross is that as an employer, you must pay at least 50 percent of the health insurance premiums for your employees. The definition of full-time employee is also important area. You can have more than the 25 employees if some of them are actually part-time workers. This formula must be calculated properly to see if the tax credit is available to you.

In 2014, the second phase of the law comes into effect and the credit increases from 35 percent to 50 percent. For nonprofit organizations, the credit increases from 25 percent to 35 percent.

In calculating the number of employees and average wages, you do not include any sole proprietor, a partner, shareholder of an S-corporation who owns more than 2 percent and any owner of a business where he or she owns more than 5 percent. For the purpose of calculating the amount of premiums actually paid, you do not include the amount of premiums paid for the owners/shareholders. To further complicate the calculation, you need to be aware that family members of the owners do not count, thus neither their wages nor hours are included in computing the number of full-time employees, wages paid and premiums paid on their behalf to determine the amount of the credit.

A family member is defined as a child, sibling, parent, niece, nephew, aunt, uncle, father- or mother-in-law, son- or daughter-in-law, or brother- or sister-in-law.

A few other options or quick facts about this credit to be aware of is even though this credit deals with employees, the credit is against income taxes not payroll taxes. The credit is claimed on the employer’s tax return. If there isn’t any income tax to be offset in the current year, you will be able to carry the unused amount to future years where you can use it to offset future income tax. In future years, you can use the credit to offset estimated payments that are made by the employer. Finally, the tax preparer will have to subtract the credit amount from the health insurance deduction; no double-dipping.

As I’ve written earlier, tax law isn’t very pretty but this is again a nice credit for small employers who have been providing insurance already and now will get their tax bill reduced. For employers who have not provided health insurance, there is now a way to help offset the cost and therefore make the decision a little better in terms of their cash flows.

This credit was put into law on March 23, but it is effective for the entire year. As we enter summer, it should be discussed with your financial or tax adviser, as this is an opportunity that shouldn’t be missed.

David Rumsey is the owner of Pettis Rumsey Inc., a Marysville accounting firm that works with small-business owners to increase financial performance, tax planning and preparation. He can be reached at 360-659-8502 or at david@pettisrumseycpa.com.