Can My Organization Earn A Tax Credit For Paying Employee Health Insurance Premiums?

Mark Fearon | June 2nd, 2010

If your small business or not-for-profit pays at least half the cost of single coverage for employees, it could be eligible for a tax credit of up to 35 percent of the premiums it pays in 2010.

The tax credit was written into the Patient Protection and Affordable Care Act approved by Congress and signed by President Obama in March. The employer subsidy is designed to encourage small businesses to offer employee health insurance coverage for the first time or maintain their existing coverage.

Employer Health Insurance Subsidy

The credit is specifically targeted to help small businesses and tax-exempt organizations that employee primarily low and moderate income workers. In general, the credit is available to employers with fewer than 25 full-time equivalent employees paying wages averaging less than $50,000 per employee per year. Because the credit is based in part on full-time equivalents, many businesses that employ more than 25 workers (including their part-time help) may be eligible.

The maximum credit of 35 percent applies to small employers who have 10 or fewer full-time equivalent employees receiving annual wages of $25,000 or less. The credit percentage decreases with more employees and higher annual pay. The tax credit is not available to companies with more than 25 full-time equivalent employees or average wages greater than $50,000. The maximum credit is also capped at 25 percent for tax-exempt organizations.

Many more small businesses and nonprofits qualify for this tax credit than with past programs, because wages of owners and relatives of the owners are excluded from the annual salary calculations. The IRS excludes owner, spouses, children, descendants of children, siblings, parents, nieces, nephews, aunts, uncles, brother-in-laws, sister-in-laws, daughter-in-laws and son-in-laws in its definition of excluded family members.

Health Insurance Credit Qualification

The tax credit is retroactive to January 1, 2010. Employers will claim the tax credit when they file their 2010 business income tax return. Therefore, fiscal year-end filers won’t be able to claim the credit until they file their business tax return for years ending in 2011. The information that your tax preparer will need to help you claim the credit includes:

–          Number of full-time employees

–          Number of part-time employees and total hours worked by part-time employees

–          Total wages paid to all employees except exempt owners and family members

–          Total amount paid for health insurance

–          Percentage of premium covered by the employer.

The tax credit increases in 2014 to a maximum of 50 percent of healthcare premium costs for businesses and maximum 35 percent of premium costs for nonprofit organizations but can only be claimed if you purchase coverage through legislation-mandated healthcare exchanges. The credit can be claimed only twice after 2013. As a result, for many businesses, the credit will dry up after 2015.

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To determine if your business or organization meets the criteria to receive the tax credit, be sure to discuss the requirements with your financial professional.

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