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Who is eligible to receive the small business health care tax credit?

The Affordable Care Act provides tax credit opportunities for small business owners that choose to offer health insurance to their employees. Small businesses with fewer than 25 full-time equivalent employees and still offer their employees health care coverage may be eligible for tax credits to help with the cost of health insurance.

Businesses that qualify for the small business health care tax credit must have average annual wages below $50,000 and must pay at least 50% of full-time employees’ premium costs. Average annual wage can be calculated by dividing total wages by number of full-time equivalents. Business owners must have purchased insurance plans through the SHOP Marketplace to be eligible.

The amount of credit is awarded based on a sliding scale – the smaller the business, the bigger the credit. Small businesses with 10 or fewer full-time employees that pay at or below $25,000 in annual average wages will qualify for the maximum small business tax credit.

Health care reform changes starting in 2014

  • Maximum credit will increase to 50% of premiums paid for small business employers and 35% of premiums paid for  small tax-exempt employers
  • Employer must pay premiums through SHOP Marketplace plan
  • Credit is available to eligible employers for two consecutive tax years

Breaking down the small business tax credit

If you pay $50,000 per year toward your employees’ health care premiums – and if you qualify for a 15% credit, you save $7,500. Savings of $7,500 per year for tax years 2010 through 2013, total savings of $30,000 over four years. If, in 2014 and beyond, you qualify for a slightly larger credit (ex. 20%), your savings increase from $7,500 per year to $10,000 per year.

Some small business employers may be able to carry the credit back or forward; tax-exempt employers may be eligible for a refundable credit.

Form 8491, Credit for Small Employer Health Insurance Premiums, can be used to calculate your small business tax credit.