Offering health benefits as a small business owner can be difficult, but it’s important in recruiting and retaining employees. That’s why the U.S. federal government created the small business health care tax credit to help small businesses contribute to their employees’ health benefits.
However, not all small businesses are eligible for a tax credit, and there are certain steps you need to take to ensure your organization qualifies.
In this article, we’ll answer the top five questions small business owners have about the small business health care tax credit:
- What are the company size requirements to be eligible for a health care tax credit?
- What are the average wage requirements to be eligible for a health care tax credit?
- What type of coverage do I need to offer to be eligible for a health care tax credit?
- How much is the health care tax credit?
- How do I claim the health care tax credit?
What are the company size requirements to be eligible for a health care tax credit?
First, let’s talk about the size requirements in order to be eligible for the small business health care tax credit. In order to be eligible for the credit, your organization must employ less than 25 full-time equivalent employees (FTEs) during the tax year.
To calculate the number of FTEs, you’ll first determine the number of full-time employees you have working at the organization (i.e. those working 30 or more hours per week).
Next, you’ll determine the “full-time equivalent” of your part-time employees (i.e. those working less than 30 hours per week) by adding the number of hours worked by all part-time employees in a given month and divide the total by 120. This gives you the number of full-time equivalents in your part-time workforce.
The number of FTEs is equal to your organization’s full-time employees plus the number of your full-time equivalent part-time employees, rounded to the lowest whole number.
What are the average wage requirements to be eligible for a health care tax credit?
Next, if your organization meets the size requirements, you’re ready to factor in the wage requirements. In order to be eligible for the credit, your organization must pay less than $50,000 in average annual wages to your FTEs.
To calculate average annual wages, you’ll add up the total wages paid to your FTEs during the tax year and divide that number by the total number of FTEs.
What type of coverage do I need to offer to be eligible for a health care tax credit?
Once you’ve determined that your organization meets the size and annual wage requirements, you must next determine if your organization pays at least 50% of an employee’s “qualified health plan” (or qualify for a limited exception to this requirement).
Qualified health plans are any plans offered through a Small Business Health Options Program Marketplace.
Keep in mind that you only need to pay at least 50% of the cost of employee-only—not family or dependent—healthcare coverage for each employee.
How much is the health care tax credit?
The amount of credit you receive depends on how small your business is. Generally speaking, the smaller the employer, the bigger the credit you’ll receive.
The maximum credit is:
- 50% of premiums paid for small business employers
- 35% of premiums paid for small tax-exempt employers
The credit is available to eligible employers for two consecutive taxable years, and you can carry the credit back or forward to other tax years. If the amount of the health insurance premium payments is more than the total credit, you may be able to 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.
How do I claim the health care tax credit?
If you think you’re eligible for the credit, you’ll first fill out Form 8941 to calculate your credit. Then, you’ll include the amount as part of the general business credit on your income tax return.
If you’re a tax-exempt organization, you’ll 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 normally do so.
Like was mentioned above, if you’re a small business owner, you may be able to carry the credit back or forward. If you are a small tax-exempt employer, you may be eligible for a refundable credit.
While many small business owners think that offering health benefits to their employees is unrealistic for their budget, the small business health care tax credit can make it possible. What’s more, offering a qualified small employer HRA (QSEHRA) can also help make contributing to your employee’s health benefits more affordable.
While offering a QSEHRA won’t qualify you for a small business health care tax credit, by offering a QSEHRA, you may not need one. With a QSEHRA, you can reimburse your employees, tax-free, for the individual health insurance premiums and qualifying medical expenses up to an employer-set monthly allowance amount.
This article was originally published on April 15, 2010. It was last updated September 13, 2021.