For tax years 2010 through 2013, the maximum credit is 35 percent for small entrepreneurs and 25 percent for small tax-exempt entrepreneurs like charities. An improved version of the credit will be effective starting Jan. 1, 2014. Additional information about the improved version will be added to IRS.gov once it becomes accessible. In general, on Jan. 1, 2014, the rate will grow to 50 percent and 35 percent, appropriately.
Here’s an example situation and computation of the small business health care tax credit: if you pay $50,000 a year toward workers’ health care premiums – and if you qualify for a 15 percent credit, you save an amount of $7,500. If you save $7,500 a year from the 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.
It doesn’t matter if you’re a small entrepreneur who did not have tax during the year, you can carry the credit back or forward to other tax years. Great news, right? Also, since the total of the health insurance premium payments is more than the total credit, eligible small entrepreneurs like you 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 returned, so even if you have no taxable income, you are qualified to receive the credit as a refund so long as it does not surpass your income tax withholding and Medicare tax liability.
Last but not the least, if you can benefit from the credit this year but forgot to claim it on your tax return there’s still time to file an amended return.
Can you claim the credit?
To be qualified, you must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees. You must also have less than 25 full-time equivalent employees (FTEs). Those employees must have average salaries of $50,000 and below per year.
Let me further explain it to you.
What is a full-time equivalent employee? Basically, two half-time workers are considered as one full-timer. For example, 20 half-time employees are equal to 10 full-time workers. Which means that the number of FTEs is 10, not 20.
When it comes to average salary, for example, the total salary of your 10 FTEs is $200,000. Divide the amount of the salary to the number of FTEs. That means each employee has an average salary of $20,000.
In addition, the amount of the credit you receive works on a sliding scale. The smaller the business or charity, the bigger the credit. So if you have more than 10 FTEs or if the average salary is more than $25,000, the amount of the credit you receive will be less.
How do you claim the credit?
The main requirement is to have a Form 8941, Credit for Small Employer Health Insurance Premiums, to compute the credit.
If you are a small entrepreneur, add the amount as part of the general business credit on your income tax return.
If you are a tax-exempt organization, add the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit.
Always keep in mind if you are a small entrepreneur you may be able to carry the credit back or forward. And if you are a tax-exempt employer, you may be qualified for a refundable credit.