Your Guide To The Small Business Health Care Tax Credit

Have you heard of the Small Business Health Care Tax Credit? If not, you might be missing out! There are a significant number of small businesses that may be eligible for this tax credit—and your business might be one of them. 

Don’t let the Small Business Health Care Tax Credit slip through your fingers! Here’s what you need to know.

What is the Small Business Health Care Tax Credit?

If you’re a small business owner, you’ve probably heard about the Small Business Health Care Tax Credit. But what exactly is it, and how can you take advantage of it?

The Small Business Health Care Tax Credit is often confused with the Affordable Care Act’s (ACA) premium tax credits, which are available to individuals and families who purchase coverage through ACA-created marketplaces. 

The Small Business Health Care Tax Credit is a federal tax credit that helps small businesses pay for health insurance. It is designed to help them provide coverage for their employees and stay competitive with larger companies that can offer more comprehensive health plans.

You can use this credit if you are paying for health insurance for yourself or your employees. You will also be able to claim the credit if you contribute to a qualified plan that provides health insurance coverage. You may need to make some changes to your existing plan or create a new one if you haven’t been contributing before now.

Small Business Health Care Tax Credit Requirements

The Small Business Health Care Tax Credit is a great way to offset the cost of insurance for your employees. If you’re a small business owner, you may be eligible for this credit. 

The credit is available only to eligible small employers that purchase coverage through a Small Business Health Options Program (SHOP) Marketplace. SHOP Marketplaces are run by the federal government and some state governments, but not all states have them yet. If your state doesn’t have a SHOP Marketplace, you can still take advantage of the Small Business Health Care Tax Credit as long as your business meets the eligibility requirements listed below:

Fewer Than 25 Full-Time Equivalent Employees

You must have fewer than 25 full-time equivalent employees (FTEs). If your business has multiple locations, this includes only the number of FTEs at each location.

If you have fewer than 25 full-time employees but have at least one part-time employee who works more than 30 hours per week, your company may also qualify for this credit if it offers coverage to all its employees and their dependents. This means that if you only have 24 full-time employees but employ four people who work 30 hours per week or more, then they will count toward your total number of employed individuals and thus help determine whether or not your company qualifies for this credit.

Average Salary of Less Than $55,000

This credit is available to businesses with average annual wages of less than $55,000 and average annual gross receipts of less than $25 million, and it can be claimed by sole proprietors and pass-through entities (including S corporations, partnerships, LLCs, and LLPs).

Qualifying Health Care Premiums

The amount of the credit varies based on your average wage and the cost of your premium. You must pay at least 50 percent of an employee’s premium cost on a monthly basis in order to qualify for a credit. For example, if an employee has $1,000 in monthly premiums, you would need to contribute at least $500 toward that total before becoming eligible for a tax credit.

You Offer Health Insurance to Your Employees

The credit is only available to businesses that provide qualifying health coverage for all of their full-time employees (and their dependents). This includes traditional employer-sponsored plans (such as PPOs) and self-funded plans (where both you and your employees pay directly into a fund that is used to cover medical expenses). It also includes COBRA continuation coverage. 

Qualifying health care coverage is any insurance plan that covers medical expenses not covered by Medicare or Medicaid. It also includes self-insured plans, which are plans where you pay the medical bills directly and then seek reimbursement from insurance companies. 

The health coverage must meet certain requirements. For example, it must include coverage for preventive services and prescription drugs. And it must cover at least 50 percent of the total cost of premiums for employee-only coverage or 65 percent of the total cost for family coverage (including dependents).

If you don’t currently offer any kind of insurance through your company but would like to start providing coverage soon, now is a good time to start the process! Learn more health care insurance tips on our website. 

Who Counts As A Full-Time Equivalent Employee?

This is one of the most confusing parts of the Small Business Health Care Tax Credit. The IRS says employers must count “full-time equivalent employees” when calculating how much they can receive as a tax credit.

A full-time equivalent employee is one who works for 30 hours or more per week. If you are an employer, you can count the number of hours that each part-time employee works in order to determine how many full-time equivalent employees you have.

For example, if you have two part-time employees who each work 40 hours per week, you would count them as two FTEs if they work more than 120 hours combined each month. If one of these employees worked 160 hours and the other worked 80 hours, then you would still have only two FTEs because they wouldn’t have combined to work more than 120 hours total per month.

You can also count variable-hour employees toward your total, as long as they work at least 120 hours within a given month.

You need to keep track of this yourself because the IRS will not automatically count your employees for you.

What’s more, if your business has more than one location with different FTE requirements, you can calculate each location’s FTE count separately and use whichever method provides the most credits. For example, if you operate two separate offices and one employs 20 employees who work 30 hours per week while the other employs 30 employees who work 20 hours per week, then you could claim credit for 40 FTEs under both locations combined. 

Owners And Family Members Don’t Qualify

Small Business Health Care Tax Credit has some stipulations that prevent certain employees from qualifying. If you’re an owner or family member of a business, you won’t be able to claim this credit.

This means that if your business is part of a family-owned company and you work there as an employee, then you can’t count those hours towards the full-time work requirement.

How Much is the Small Business Health Care Tax Credit Worth?

When you’re a small business owner, it’s not enough to just have a great product or service—you also have to manage your finances. And when it comes time to pay taxes, that can be a real challenge.

But not anymore! Thanks to the Small Business Health Care Tax Credit, small businesses like yours can get up to 50% of their health care coverage costs back as a tax credit. That means more money in your pocket and fewer headaches at tax time.

The exact value of the credit depends on how much you spend on health care for your employees, as well as your business’s taxable income in a given year.

To calculate the exact value of this credit, you need to know how much you spent on employee health care coverage during the year, and how much your business’s taxable income was.

Credit Limitations

The amount of your credit depends on how much you pay toward employee health insurance premiums. The maximum annual credit amount is $500 per full-time employee (up to 35% of the amount paid). 

You may claim the full $500 credit for each employee if you paid at least 50% of their premiums, or no more than 25% if you paid less than 50%. If you paid between 25% and 49%, you can claim a partial credit based on how much you actually paid out-of-pocket for employee health insurance premiums.

How Do You Claim the Small Business Health Care Tax Credit?

Whether you’re just starting a business, or you’ve been at it for years and are looking to expand, the Small Business Health Care Tax Credit can help you.

How do you claim the small-business health care tax credit? It’s easy!

First, fill out Form 8941 (Excise Taxes) and Form 8944 (Net Operating Losses). These forms are available on the IRS website. You will also need to file Schedule C or Schedule F with your return, along with Form 1040 or Form 1065 (depending on whether you are filing an individual return or a corporate return).

Next, calculate your net income from the business by subtracting all expenses from gross income. This includes wages paid to employees plus any other expenses such as advertising costs and travel bills incurred while conducting business.

Finally, multiply this amount by 50 percent to get your maximum credit amount. For example, if your net operating loss is $20,000 and you paid $10,000 in wages to employees then your maximum credit would be $5,000.

A business can also claim the credit for up to two years, but not more than 40 percent of its average annual wages in any given year.

For example, if an employer has eight full-time employees and pays an average of $10 an hour for each employee, then it could get a maximum credit of $4,800 (assuming that it does not exceed its limit of 40 percent of its average annual wages). If a business has 10 part-time employees who earn $9 an hour and it pays half their health insurance premiums, then it could receive a maximum credit of $500 (assuming that it does not exceed its limit of 40 percent of its average annual wages).

When To Claim

The best time to claim this credit is at the end of the year when you file your taxes. Most likely you will need to give your accountant or bookkeeper instructions on how much of your premium payments should be allocated towards this tax credit. 

It’s important to note that if you don’t file by April 15th, then you won’t be eligible for this deduction even if it’s retroactive.

Claiming a Credit and Deduction

Small businesses can claim a tax credit and deduction that can help offset the cost of providing health insurance to their employees. There are two ways you can claim this credit:

1. Claiming a Credit

This means that you will reduce your taxable income by the amount of the credit. This is a dollar-for-dollar reduction in your taxes, so if you get a $500 credit, it will lower your total tax bill by $500. You have to claim this credit on Form 8941, “Credit for Small Employer Health Insurance Premiums.”

2. Claiming a Deduction

This means that you will reduce your taxable income by the amount of the deduction—not dollar for dollar, but rather by reducing your taxable income by a certain percentage of what you paid in premiums (a percentage determined by how many employees were covered). You have to use Form 8844, “Credit for Employer-Provided Health Insurance,” to report this deduction.

The Final Words

The small business tax credit for health insurance is a fairly straightforward tax break. Basically, if you can prove that you provide affordable insurance to your employees, the government will give you a credit worth half of the cost of your premiums. That’s it—it’s an easy way to save a little cash at tax time.

With all of the ways to cut costs in a small business, it is hard to know where to begin. The Small Business Health Care Tax Credit is one of the most important savings options available to businesses today. 

Looking for ways to lower expenses in a small business? Check out our website for more helpful articles!

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