What You Need to Know about the Small Business Health Care Tax Credit

July 17 - Posted at 2:01 PM Tagged: , , , , , , , ,

For tax years 2010 to 2013, the maximum credit is 35% of medical premiums paid for small business employers and 25% of medical premiums paid for small tax-exempt employers, such as charities.


For tax years beginning in 2014 or later, there are changes to the credit:


  • The maximum credit increases to 50% of medical premiums paid for small business employers and 35% of medical premiums paid for small tax-exempt employers. 
  • To be eligible for the credit, a small employer must pay medical premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace or qualify for an exception to this requirement.
  • This credit is available to eligible employers for two consecutive taxable years.



Here’s what this means for you: If you pay $50,000 a year toward health care premiums for employees — and if you qualify for a 15% credit, you save… $7,500. If you save $7,500 a year from tax year 2010 through 2013, that’s total savings of $30,000. If, in 2014, you qualify for a slightly larger credit, say 20%, your savings go from $7,500 a year to $10,000 a year.



Even if you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments is more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.


There is good news for small tax-exempt employers too. The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability. Refund payments issued to small tax-exempt employers claiming the refundable portion of credit are subject to sequestration. For more information on sequestration, click here


And finally, there may still be time to file an amended return to benefit from the credit this year. Generally, a claim for refund must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid.


Can you claim the credit?

Now that you know how the credit can make a difference for your business, let’s determine if you can claim it.


To be eligible for the credit,  you must:

  • cover at least 50% of the cost of employee-only (not family or dependent) health care coverage for each of your employees
  • have fewer than 25 full-time equivalent employees (FTEs)
  • have average wages of less than $50,000 (as adjusted for inflation beginning in 2014) per year
  • purchase group medical insurance through the SHOP Marketplace (or qualify for an exception to this requirement) to be eligible for the credit for tax years 2014 and beyond.


How do you claim the credit?

You must use IRS Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. For detailed information on filling out this form, see the Instructions for Form 8941.


If you are a small business, include the amount as part of the general business credit on your income tax return.

If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don’t ordinarily do so.

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