United States

Small business health care tax credit

ARTICLE  | 

Eligible small employers may be entitled to a tax credit for health insurance premiums they pay for employees. To qualify for the credit for 2014 and future years, an employer must:

  • Purchase health insurance through the Small Business Health Options Program (SHOP) component of the internet-based health insurance marketplace
  • Pay not less than 50 percent of the premium for qualifying employee health insurance
  • Have fewer than 25 full-time equivalent (FTE) employees for the tax year
  • Pay average annual wages of less than $50,000 per FTE

Employers with less than 10 FTEs and average annual wages of $25,000 or less are eligible for the full credit. There is a phase-out of the credit for employers that have between 10 and 25 FTEs or average annual wages between $25,000 and $50,000. The $25,000 and $50,000 average annual dollar amounts are increased each year for inflation. For 2015, these amounts are $25,800 and $51,600 respectively; and for 2016 the phase-out is for wages between $25,900 and $51,800.

Small employers can claim a credit of up to 50 percent of the premium paid by the employer. Tax-exempt entities are eligible for a 35 percent credit. The credit is based on the lesser of the employer’s actual premium payments or the average premiums in the small group market in its employees’ rating area. The credit is only available for two consecutive tax years after 2013, but it can be carried back or carried forward.

All employers calculate the credit using IRS Form 8941, Credit for Small Employer Health Insurance Premiums. Taxable employers claim the credit on their federal tax return and can apply the credit to both regular and alternative minimum tax. Tax-exempt employers claim the credit by filing Form 990-T, Exempt Organization Business Income Tax Return, and can receive a refundable credit up to the amount of the employer’s payroll taxes.

To promote the credit, the IRS has created a video, a questions-and-answers document and a calculator for estimating the credit. To access these items and obtain additional information, visit the IRS website Small Business Health Care Tax Credit and the SHOP Marketplace

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