Small businesses can determine if they are eligible for the new health care tax credit under the Patient Protection and Affordable Care Act—and estimate the amount of the credit they will receive—through a new guidance from the Internal Revenue Service (IRS).
The credit is designed to help small businesses and tax-exempt organizations that primarily employ low- and moderate-income workers offer health insurance coverage for the first time or maintain coverage they already have.
It’s generally available to employers that:
- Have fewer than 25 full-time equivalent (FTE) employees Pay wages averaging less than $50,000 per employee per year
- Pay at least half the cost of single coverage for their employees
Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify for the credit even if they employ more than 25 individual workers.
The IRS information (Notice 2010-44), also clarifies that small businesses can:
- Receive state health care tax credits and still qualify for the full federal tax credit
- Receive the credit not only for regular health insurance but also for add-on dental and vision coverage.
The maximum credit is 35% of premiums paid in 2010 by eligible small business employers and 25% of premiums paid by eligible tax-exempt organizations.
In 2014, the maximum credit increases to 50% and 35% respectively. The maximum credit goes to smaller employers—those with 10 or fewer FTEs—that pay annual average wages of $25,000 or less.
Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit.