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Small Business Employee Benefits and HR Blog

What’s the difference between SHOP and individual premium tax credits?

January 22, 2016
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Many people we speak with seem confused about healthcare tax credits, and What’s the difference between SHOP and individual premium tax credits?subsidies. This article provides a high-level overview of highlighting how individual tax credits and subsidies differ from the small business tax credit (SHOP).

Tax Credits

A tax credit is typically a subtraction from taxes you otherwise owe. Business owners should know about two healthcare tax credits: the individual tax credit and the small business tax credit.

Individual Tax Credit

If an individual is eligible, and applies through their state Exchange (ex: healthcare.gov), they can claim an individual premium tax credit. This includes self-employed individuals who are treated as individuals, not as small businesses. Individuals are eligible if:

  • The household earns between 138% and 400% of the federal poverty level (FPL). As a reference, 400% of FPL is $47,080 for an individual in 2015, and $97,000 for a family of four. See these 2015 FPL Charts.
  • The individual is not eligible for an employer or government health plan.

The individual premium caps the cost of health insurance on a sliding scale, between 2 - 9.5% of household income, depending on income.

The individual premium tax credit is advanced payable, which means the discount is applied at the time of purchase. You don’t have to wait to file your tax return in order to benefit from the credit.

Find more details about the individual tax credit.

Small Business Tax Credit

In 2016, the small business tax credit is worth up to 50% of an employer’s contribution toward employees' premium costs (up to 35% for tax-exempt employers) and is applied to the business, not the employees. 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.

To be eligible for the small business healthcare tax credit you must:

  • 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), and
  • Purchase a group health insurance plan through your state's SHOP Marketplace.

Government Subsidies

A government subsidy is generally a benefit individual’s receive from the government. Usually, a government subsidy is tax free (not included in taxable income).

In regards to healthcare, the government is offering cost-sharing subsidies to individuals (in addition to the individual premium tax credits). The government subsidies help those who qualify pay for their deductibles, co-payments, co-insurance, and out-of-pocket medical expenses. The cost-sharing subsidies are available for individuals whose household income is between 100% and 250% of the FPL.

If you're a small business owner, what questions do you have about healthcare deductions, tax credits, and subsidies? Leave a comment and we'll help answer.

35 Answers To Common Questions on Individual Health Insurance Reimbursement

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