Taxable year 2010.

Small Businesses (under 25 full time employees) can get a Tax Credit when they provide health insurance for their employees.

YOU CAN DO THIS!  We’ve made it easy to understand how to calculate this, at least to see if you are in the ball park of qualifying for a tax credit.

Starting in 2010, a tax credit (different than a tax deduction) could be given to a small business employer who purchased or has/had group health insurance for their employees that met certain guidelines. 

These guidelines are that the business cannot have over 25 full time “equivalents employees” (see below) and that the average income for the employees did not or cannot exceed $50,000.  Also, the employer must be contributing towards the premium (meets IRS code for contribution, usually a minimum uniform percentage of at least 50% of the premium for the employee).  If the employer is NOT contributing the minimum per the IRS code Sec. 45R(d)(4) you will not qualify for a tax credit. 

The employer could get up to a 35% Tax Credit, and Tax Exempt 501C Employers can get up to 25% Tax Credit years 2010-2013.  These percentages increase in 2014 to 50% max credit for small employers and 35% for tax exempt employers.  In 2014, however, the employers MUST buy through the SHOP Exchange in order to qualify for the Tax Credit.

The maximum credit for the small business is if the average wage is $25,000 per year per employee or less, and has 10 full time equivalent employees or less.  As wages and number of employees grows, the tax credit decreases, until the average annual wage of $50,000 per employee and has 25 or more full time equivalents is reached.  Beyond this point, there is no more tax credit eligibility.

To figure out if a small business owner qualifies for the Small Business Tax Credit.

Determine who’s hours are counted.  The 1st PHASE – Step 1 is to see if you qualify for a tax credit.  You must first calculate the number of Full Time Employees AND Full Time Equivalents to see if you have 25 or fewer full time equivalents employees to qualify for the Tax Credit.  Who is included and who is not included (excluded?)

Figure out first who your excluded employees are.  All of the following in this paragraph are to be excluded from the equation.  This would be seasonal workers that work less than 120 days in a calendar year, self-employed (owners) of any company that owns 2% or more of an S-Corp, or 5% of a Corporation, Sole Proprietors, Partners in Partnerships.  Certain family members such as: Children, Siblings, Step-siblings, Parents, Step-parents, Nieces, Nephews,  Aunts, Uncles, Sons-in law, Daughters-in-law, Fathers-in-law, Brothers-in-law, Mothers-in-law, Sisters-in-law, Dependents, Ancestry, and any member of the household of an owner or partner who qualifies as a dependent.

The 2nd step is to aggregate (add up everyone’s hours) that is not excluded.  The most effective method of calculating this is called “Actual Hours of Service”.   So you’ll add all full time employees (max you can count is 2080 hours in a year no matter how much overtime they may have worked) and your part time employees (hours they work in a calendar year) and Seasonal workers are counted IF they worked over 120 days in the taxable year.  Add this big number of total hours worked up together and then divide by 2,080.  If you do not have hours tracked, see below under [Alternate methods of calculating hours of service].

For example:

Suppose you have 6 Full Time Employees who work 40 hours a week, 52 weeks a year – 6x40x52=12,480 hours

Suppose you have 16 Part Time Employees that work 15 hours a week, 26 weeks per year – 16x15x26=6,240 hours

So add your FT + your PT – 12,480+6,240 = 18,720 (grand total hours worked).  Now Divide this number by 2,080

18,720 / 2080 = 9 Full Time Equivalent Employees.  Congratulations, you can move on to the next step.


Alternate methods of calculating hours of service

2nd Method of calculating hours worked if your business has not kept records of hours worked would be to add days worked.  This is called:  “Days-worked Equivalency”.  Each day worked will be counted as 8 hours regardless of how long they actually worked.  This method is not as effective as hours worked.

The 3rd method of calculating hours worked would be weeks worked.   This is called:  “Weeks-worked Equivalency”.  If your employees worked 1 hour in the week, you must count 40 hours worked for that week.  Not nearly as effective as hours or days worked.



Now you’ll need to calculate Average Annual Wages for the same group of employees.  You’ll take the annual wage of all your eligible employees (the non-business owners/relatives) and add all those wages up to one large number.  Now divide that large number by the number of Full Time Employees/Equivalents you had from the 1st Step.  This is how you do it:

For example: 6 Full Time Employees – Each make $34,000 per year.  6X$34,000 = $204,000

16 Part Time Employees make $15/hour, work 15 hours/week x 26 weeks.  16x$15x15x26 = $93,600

Add full time and part time salaries together – $204,000 + $93,600 = $297,600

Now take the total wages and divide by Full Time Equivalents $297,600 / 9 (FT equivalents) = $33,066

“Average Annual Wage” per Full Time Equivalents in this scenario is $33,066.  In this practice scenario, this employer WOULD qualify for a partial tax credit.  Congrats!   If this number were greater than $50,000, you would NOT qualify for a tax credit.

Calculating the Credit Amount for the Small Business

***The Tax Credit acts to offset the employers’ actual tax liability.

Please note – the Small Business Tax Credit beginning in 2014 is only available if you purchase plans through the SHOP Exchange.  Prior to year 2014 it did not matter where you purchased the plans, you could still qualify for the tax credit IF you met the guidelines.

This calculation is done 1 time each year.  To claim the credit you’ll fill out Form 8941 and Tax Exempt form 990-T. 

Disclaimer: We HIGHLY recommend you consult your accountant, this method of calculating your small business tax credit is a convenience to you, but is not to be a substitute for an accountant verifying the information to be correct. 

NOTICE:  Aggregation rules apply.  If any “Common Control” aspect of 1 or multiple businesses is owned by 1 person or any member of his family or extended family or business partners (common owner/common interests) the number of employees will “Aggregate”.  It DOES NOT MATTER if the different businesses are separate in any way; TIN, etc.  The only thing that matters is what the relationship is, defined in the Aggregation Rules – all employees will get added together.  The aggregation rule is very complex and speaking with an Attorney and/or Accountant that specializes in the Affordable Care Act is recommended.

NOTE:  Small Employers need to be aware that if you are providing insurance to your employees and NOT their dependents or spouses, the employee’s spouse and dependents ARE able to get a subsidized plan on the “Exchange”, but the subsidy is based off of the “Household” income.  HOWEVER, if you DO OFFER coverage to the spouse and their dependents, and they elect not to take the coverage (most of the time it’s because it’s too expensive), then that spouse and dependents are NOT able to get a subsidized plan!  Please keep this in mind.  You may repel employees if you are not careful.

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