How the Credit Works

An Overview of the Small Business Health Care Tax Credit

The small business health care tax credit was created in 2010 to help offset the fast rising cost of health insurance. At its most basic level, for tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax exempt employers. Starting in 2014, the credit will increase to a maximum amount of 50 percent and 35 percent respectively.

Eligibility

To be eligible, you must cover at least 50% of the cost of single health care coverage for each of your employees. You must have fewer than 25 full time equivalent (FTE) employees, and those employees must have an average annual wage of less than $50,000.  Wages and employment count excludes owners and their families. The calculation for this credit is only focused on employees.

If you have part-time employees, you must convert them to FTEs. A simple way to calculate FTEs is to take the total number of part-time hours and divide by 2080. So 15 part-timers that work a total of 14,560 hours equates to 7 FTEs.

The IRS has created a very easy to follow document to help determine eligibility. Download the pdf here.

How much is the credit worth to you?

The small business health care tax credit has a sliding scale where the highest credit value goes to the smallest employers paying the lowest wages. As employee headcount and wages increase, the value of the credit decreases. View the tables here.

How to claim the credit

The foundation of the information contained on this page was derived from the IRS page dedicated to this credit. View that page>>

Credit In Action

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