IRS Offers New Guidance on Small Business Health Care Tax Credit

The taxman cometh, and the taxman will most certainly taketh — but in the meantime, the taxman giveth. The IRS recently issued final instructions and forms for small businesses hoping to take advantage of the new health care credit for the 2010 tax year. The credit, created as part of the recent federal health care reform, allows eligible businesses to claim up to 35% of their employee health insurance costs on their tax return.

Your business must satisfy three key requirements to receive the credit:

1) You paid premiums for employee health insurance coverage under a qualifying arrangement. That generally means that you paid at least 50% of each enrolled employee’s individual health insurance premiums during the tax year. There are also certain circumstances in which you might still qualify even if you paid less than 50% of premiums. If that’s the case, be sure to read Notice 2010-82 to determine if you’re still eligible to claim the credit.

2) You had fewer than 25 full-time employees for the tax year. The critical thing to remember here is that your eligibility is based on full-time — not total — employees. That means your part-time staff doesn’t count toward the cut-off, so you may still qualify even if you have, for example, 30 total employees.

3) You paid average annual wages of less than $50,000 per full-time employee. This one is fairly straightforward: The credit is phased out completely for companies that pay average annual wages of $50,000 or more for the tax year. Again, keep in mind that this applies to full-time workers only.

The key new form you or your tax preparer will need is Form 8941, Credit for Small Employer Health Insurance Premiums. If your business is tax-exempt, you’ll use Form 8941 to figure your credit, but you’ll actually claim the credit on newly revised Form 990-T. The maximum credit for smaller non-profits is 25% of premiums paid.

Small businesses can claim the credit for 2010 through 2013 and for any two years after that, according to the IRS. The maximum credit is reserved for the smallest employers: Businesses with 10 or fewer full-time employees who earn an average of $25,000 or less per year. In 2014, the maximum credit jumps to 50% of premiums paid for eligible small employers and 35% for eligible tax-exempt organizations.

Keep in mind that this is tax code, so there are some “ifs,” “ands,” and “buts” that you may need to consider for your specific business. But if you think you qualify for the credit based on the three basic requirements, it’s certainly worth the time to read the complete instructions or consult with your tax preparer. The taxman cometh, after all, but the health care credit could save you big bucks on your bill and reduce the burden that health coverage puts on your bottom line.

About Kevin Casey

Kevin Casey is a regular contributor here, at InformationWeek and elsewhere. Find him on Twitter @kevinrcasey.
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Hi Kevin,


I am trying yo find out whether an owner of a small business qualifies for the Small Business Health Care Credit if he offers health insurance only to his full-time employees (all other conditions are met). Would you be able to clarify?


Thank you!!