Small Business Health Care Tax Credit Information

Small employer? Get the credit you deserve.

If you are a small employer... with fewer than 25 full-time equivalent employees, pay an average wage of less than $50,000 a year, and pay at least half of employee health insurance premiums ...then there is a tax credit that may put money in your pocket.

What You Need to Know about the Small Business Health Care Tax Credit

How will the credit make a difference for you?

For tax years beginning in 2014 or later, there will be changes to the small business health care tax credit:

  • The maximum credit increased to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
  • To be eligible for the credit, a small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace.
  • The credit will be available to eligible employers for two consecutive taxable years.

Even if you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments is more than the total credit, eligible small businesses 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 refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability.

And finally, 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.

There is no health care reform requirement for businesses with less than 50 full-time equivalent employees (FTEEs) to offer group health insurance or pay a penalty, i.e., small businesses do not have a "pay or play" decision to make.

It is very important to emphasize, however, that many employers who think they have less than 50 full-time equivalent employees (FTEEs) may actually have more than 50 FTEEs based on complicated health care reform calculations involving common law employees, hours of service, common ownership rules and seasonal employees that come into play. You may wish to consult with a CPA or an attorney if you have questions on how to calculate your total FTEEs based on health care reform guidelines.

A small business owner who owns several small businesses, even if each business has a separate tax ID number, will likely have to combine all the businesses in calculating whether they reach the 50 full-time equivalent employee (FTEE) threshold or not. A large number of part-time employees can also push a business over the 50 FTEE threshold based on the formula.

A small business that in error believes they have less than 50 FTEEs when, based on the health care reform calculation has more than 50 FTEEs, is potentially subject to the same fines and penalties levied against large employers. Again, every small business should carefully evaluate your status with your CPA and/or attorney.

Starting in 2014, tax credits increased for employers with 24 or fewer employees (with an average wage of less than $50,000 a year) who offer coverage through the Small Business Health Options Program (SHOP) Exchange Marketplace.

  • The credit covers up to 50% of the employer's cost (35% for small nonprofit organizations).
  • Employers are eligible for credits in the first two years they offer coverage through the SHOP Exchange Marketplace.
  • Credits decrease on a sliding scale as group size and employee wages increase.

Small employers may purchase coverage either on the SHOP Exchange Marketplace or directly from a carrier. The employer will want to make sure they purchase qualifying health coverage so their employees avoid personal tax penalties.