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Small Business Employee Benefits and HR Blog

Small Business Health Care Tax Credit FAQs - 2014

January 3, 2014
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In 2010, the Affordable Care Act created the small business health care tax credits. While the tax credits are not a new provision, there are new guidelines and calculations for 2014. Here are FAQs to help small businesses understand the changes to the small business health care tax credits in 2014.

What is the small business health care tax credit?

The small business tax credit was designed to help small businesses provide health insurance coverage to employees. In 2014, the tax credit is worth up to 50% of your contribution toward employees' premium costs (up to 35% for tax-exempt employers). The tax credit is highest for small businesses with fewer than 10 employees who are paid an average of $25,000 or less. The smaller the business, the bigger the credit.

Which small businesses are eligible for the health care tax credit?

To be eligible for the small business health care tax credit you must meet these three criteria:

  • Be an employer with fewer than 25 full-time equivalent (FTE) employees, and 
  • Pay an average wage of less than $50,000 a year per employee, and
  • Pay at least half (50%) of employee health insurance premiums (for full-time employees only)

For more information on the small business tax credit, and which expenses qualify, see these small business health care tax credit FAQs from 2013.

How is the small business health care tax credit changing in 2014?

For tax years beginning in 2014 or later, there are three changes to the tax credit:
  1. The maximum credit will increase to up to 50% of premiums paid for small business employers and up to 35% of premiums paid for small tax-exempt employers. From 2010 to 2013 it was 35% and 25%, respectively.

  2. To be eligible for the credit, a small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace. One exception is if there are no SHOP Marketplace plans offered in their region.

  3. The credit will be available to eligible employers for two consecutive taxable years.

What if our small business did not owe tax during the year?

According to the IRS, 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.

For small tax-exempt employers, 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.

What are some examples of the small business health care tax credit?

Here are three scenarios of how the small business health care tax credit works. To calculate your small business health care tax credit, see Small Businesses Health Insurance Tax Credit Savings Calculator.

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Source: IRS.

How do we claim the small business health care tax credit?

According to the IRS, you must use 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 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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