The Affordable Care Act (ACA) amended the tax code by adding a tax credit for small employers that
provide health care coverage for their employees. The credit is available to employers that:
- Have fewer than 25 full-time equivalent (FTE) employees;
- Have an average employee salary of about $56,000 per year or less;
- Pay at least 50% of their full-time employees’ premium costs; and
- Offer SHOP coverage to all of their full-time employees; this coverage does not need to be offered
- to dependents or employees working fewer than 30 hours per week.
Maximum Credit Amount
The maximum credit is 50% of premiums paid for small business employers and 35% of premiums paid for small tax-exempt employers. The credit is available to eligible employers for two consecutive taxable years.
The amount of the credit is on a sliding scale; smaller employers receive a bigger credit. For employers
with more than 10 FTE employees, or an average wage of more than $25,000 (as adjusted for inflation), the amount of the credit will be less.
The credit can result in substantial savings. The IRS uses the following as an example: If you pay $50,000 a
year toward employees’ health care premiums, and if you qualify for a $10,000 credit each year, you can
save $20,000 over the course of two years.
Flexibility to Carry Forward or Back
The IRS says that even if your small business does 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.
For More Information
The small business tax credit can help you provide the benefits your employees expect while helping you
control the associated costs. If you need help calculating FTEs or their wages, talk to your tax adviser.
Additional information is also available on the IRS website.
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