Health reform legislation signed by President Obama includes a Small Business Health Care Tax Credit to help small businesses afford the cost of covering their workers.
Key Facts about the Small Business Health Care Tax Credit
The tax credit, which is effective immediately, can cover up to 35 percent of the premiums a small business pays to cover its workers. In 2014, the rate will increase to 50 percent.
The Congressional Budget Office estimates that the tax credit will save small businesses $40 billion by 2019.
Both small for-profit businesses and small not-for-profit organizations are eligible.
Available Immediately. The credit is effective January 1, 2010. As a result, small businesses that provide health care for their workers will receive immediate help with their premium costs, and additional firms that initiate coverage this year will get a tax cut as well.
Broad Eligibility. The Council of Economic Advisors estimates that 4 million small businesses are eligible for the credit if they provide health care to their workers. Qualifying firms must have less than the equivalent of 25 full-time workers (e.g., a firm with fewer than 50 half-time workers would be eligible), pay average annual wages below $50,000, and cover at least 50 percent of the cost of health care coverage for their workers.
Substantial Benefit. The credit is worth up to 35 percent of a small business’s premium costs in 2010. On January 1, 2014, this rate increases to 50 percent.
Firms Can Claim Credit for Up to 6 Years. Firms can claim the credit for 2010 through 2013 and for any two years after that.
Non-Profits Eligible. Tax-exempt organizations are eligible for a 25 percent tax credit in 2010. In 2014, this rate increases to 35 percent.
Gradual Phase-Outs. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.
Premium Cost Eligibility. To avoid an incentive to choose a high-cost plan, an employer’s eligible contribution is limited to the average cost of health insurance in that state.
Getting the Word Out to Small Businesses
To ensure that small businesses know about the credit and how to claim it, the Administration is initiating a nationwide educational campaign for small businesses and tax preparers.
WhiteHouse.gov Web Feature. Starting today, WhiteHouse.Gov will feature a special section on the Small Business Health Care Tax Credit.
Millions of Postcards to Small Businesses: In the coming weeks, IRS will send out postcards to millions of small businesses who may be eligible for the credit, urging them to look at the criteria and take advantage if they qualify.
Over 1,000 Tax Workshops and Small Business Forums. Every year, tens of thousands of small businesses and tax professionals around the country attend Small Business Forums and Tax Workshops where they can hear from IRS representatives about new developments in tax law. This year, IRS outreach will have a special focus on the small business credit to get the word and answer questions about how the credit works and how to claim it.
Email Blast to 175,000 Tax Professionals. IRS will use its IRS e-News for Tax Professionals mailing list to notify over 175,000 tax professionals.
Special Section on IRS.gov. The IRS is featuring a new section on the front page of IRS.gov on new tax tips, detailed frequently asked questions and a worksheet to help small business owners determine if they qualify.
Benefit from Small Business Health Care Tax Credit: Four Cases
Example 1: Auto Repair Shop with 10 Employees Gets $24,500 Credit for 2010
Main Street Mechanic:
Wages: $250,000 total, or $25,000 per worker
Employer Health Care Costs: $70,000
2010 Tax Credit: $24,500 (35% credit)
2014 Tax Credit: $35,000 (50% credit)
Example 2: Restaurant with 40 Part-Time Employees Gets $28,000 Credit for 2010
Employees: 40 half-time employees (the equivalent of 20 full-time workers)
Wages: $500,000 total, or $25,000 per full-time equivalent worker
Employer Health Care Costs: $240,000
2010 Tax Credit: $28,000 (35% credit with phase-out)
2014 Tax Credit: $40,000 (50% credit with phase-out)
Example 3: Foster Care Non-Profit with 9 Employees Gets $18,000 Credit for 2010
First Street Family Services.org:
Wages: $198,000 total, or $22,000 per worker
Employer Health Care Costs: $72,000
2010 Tax Credit: $18,000 (25% credit)
2014 Tax Credit: $25,200 (35% credit)
Example 4: Manufacturing Company with 12 Employees Gets $14,700 Credit for 2010
Acme Air Conditioning, LLC:
Wages: $420,000 total, or $35,000 per worker
Employer Health Care Costs: $90,000
2010 Tax Credit: $14,700 (35% credit with phase-out)
2014 Tax Credit: $21,000 (50% credit with phase-out)
4. Reduces the Hidden Tax on Small Business Employees with Health Insurance.
Status Quo: Hidden Tax Adds $1,000 to Every Premium: Currently, the cost of treating the uninsured adds a “hidden tax” of over $1,000 to every health care premium.
Solution: Reduce Hidden Tax by Dramatically Expanding Coverage: Health reform will significantly reduce this tax by covering an additional 32 million additional Americans by 2019.
The credit rates are lower for non-profits to ensure that the value of the credit is approximately equal to that provided to for-profit firms that cannot claim a tax deduction for the amount of the credit claimed.