Qualifying for the Small Business Healthcare Tax Credit

Author: M. Duffy Date: October 18, 2012


Here’s how to determine whether or not you qualify for this credit.

If you are a small business employer who pays at least half of your employees’ health insurance premiums, you might be eligible for a tax credit. But the credit may be difficult for many small businesses to obtain.

Until the 2013 tax year, there is a maximum tax credit of 35 percent for small business employers and 25 percent for small tax-exempt organizations. Beginning in the 2014 tax year, that rate will ramp up to 50 percent and 35 percent, respectively.

Before you start counting how much extra money you’ll be able to pocket, you must first determine if your business is eligible.

Fewer than 25 Full-Time Equivalent Employees

“Equivalent” is the key word. You have to not only count  full-time, at least 40 hours a week, but also year-round part-time employees’ hours. “This number is the big overarching umbrella of this tax credit,” says Lindsey Buchholz, a lead tax research analyst at the Tax Institute at H&R Block based in Kansas City, Mo. For example, if your business has 40 half-time employees, that is the equivalent of 20 full-time employees.

You must count these employees regardless of whether or not you offer health insurance to part-time employees, says Buchholz. Seasonal employees, however, are not counted. You must add up the hours your full-time and part-time employees have worked in the year and divide that number by 2,080, the total hours a full-time employee would work in one year. That number will give you how many full-time equivalent employees you have. In order to qualify, that number has to be less than 25.

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Pay an Average Wage of Less Than $50,000 a Year

The next hurdle consists of meeting the required average wage paid to your full- and part-time employees. That average must be less than $50,000 a year. For example, you have paid yearly total wages of $200,000 and you have figured out that your business employs 10 full-time equivalent workers; your average wage will be $20,000 a year. You will be eligible for the tax credit since the average is below $50,000.
Pay at Least Half of Employee Health Insurance Premiums

You must pay at least 50 percent of the cost of single, but not family, healthcare coverage for your employees. The amount of credit you can get works on a sliding scale, with the smaller business or nonprofit receiving the larger credit.

For help in calculating your potential Small Business Health Care Tax Credit, check the NFIB health insurance tax credit calculator, visit the IRS website, or consult with your tax professional.

RELATED: Issues—Healthcare Reform

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