Wednesday, April 21, 2010

Does my business qualify for the small employer tax credit?

Under the Patient Protection and Affordable Care Act (PPACA), small businesses that choose to provide health insurance could be eligible for a credit toward their cost of coverage. To be eligible, the small employer must contribute at least 50% of the cost of premiums towards a qualified health plan.

Maximum tax credit
• 35% of the employer premium contribution, for tax years 2010-2013
• 50% of the employer premium contribution for coverage purchased through the exchange, beginning in 2014 and for no more than two consecutive taxable years

The maximum tax credit for non-profit organizations is the lesser of (1) a 25% credit (2010-2013) and a 35% credit (beginning in 2014), or (2) the amount of employer-paid payroll taxes for the calendar year.

The maximum tax credit is available to groups with 10 or fewer full-time equivalent employees (FTEs) and $25,000 or less in average salary. The credit phases out as average salary increases from $25,000 to $50,000 and as the number of FTEs increases from 10 to 25.

Additionally, the amount of an employer’s premium payments that counts for purposes of the credit calculation is capped based on the average premium for the small group market in the State, as determined by the Secretary. This is to avoid incentivizing groups to choose a high-cost plan.

A qualified employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit.

The credit is calculated as follows:

1. Initial amount of credit determined before any reduction: (35% x $96,000) = $33,600

2. Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480

3. Credit reduction for average annual wages in excess of $25,000: ($33,600 x $5,000/$25,000) = $6,720

4. Total credit reduction: ($4,480 + $6,720) = $11,200

5. Total 2010 tax credit: ($33,600 – $11,200) = $22,400

For more information, click to access the IRS Small Business Health Care Tax Credit: Frequently Asked Questions.

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