Small Business Tax Credits
Small business premium tax credit: Does the IRS owe you money?
How does the premium tax credit work?
Beginning in 2010 and continuing through 2013, the Affordable Care Act provides health insurance premium tax credits of up to 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities. Beginning on January 1, 2014 when the Tennessee Health Insurance Marketplaces officially opens, the maximum tax credit will increase to 50 percent (small companies) and 35 percent (tax exempt), respectively. After January 1, 2014 you MUST purchase your group health insurance policy through the Small Business Health Options Plan (SHOP) to be eligible for this tax credit. The tax credit program is scheduled to continue through 2016. You will find that the smaller your company, the better your chance of receiving a credit.
Which TN companies are eligible for the tax credits?
Only companies with fewer than 25 employees and average wages below $50,000 are eligible for the tax credits. Additionally, you must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees.
Here is an example. If you pay $50,000 a year toward workers' health care premiums “ and if you qualify for a 15 percent credit, you save ¦ $7,500. If you save $7,500 a year from tax year 2010 through 2013, that's total savings of $30,000. If, in 2014, you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $12,000 a year. If you are eligible for a credit but have not claimed it, you can receive retroactive credit back to 2010.
How to determine if you are eligible for a tax credit
The amount of your tax credit is based on the number of FTEs and your average wages for that year. For example, suppose you pay total wages of $200,000 and have 10 Full Time Employees (FTEs). To calculate your average wages you divide $200,000 by 10 “ the number of FTEs “ and the result is $20,000 as your average wage. To calculate your expected tax credit, use this calculator from the National Federation of Independent Business Tax Credit Calculator
Also, the amount of the credit you receive works on a sliding scale. The smaller the business or charity and lower the average income, the bigger the tax credit. If you have more than 10 FTEs or if the average income is more than $25,000, the amount of the credit you receive will be less.
Even 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 are 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.
There is good news for small tax-exempt employers, too. The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund as long as it does not exceed your income tax withholding and Medicare tax liability.
If you need assistance determining if your small business or tax exempt organization qualifies for the credit, try this step-by-step guide.
Do you have questions about the SHOP Marketplace for businesses with 50 or fewer employees? We are here to help you determine you best options. Feel free to call us at 615-724-1701 or send an email to us.