The Affordable Care Act or more commonly known as ObamaCare was enacted on March 23, 2010. It contains some tax provisions that are in effect and more that will be implemented during the next several years.As part of the Health Care Reform Act's effort to assist small businesses in providing health care coverage, a health care tax credit was created based on health insurance premiums paid for employees. For tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities. In general, on Jan. 1, 2014, the rate will increase to 50 percent and 35 percent, respectively.
To be eligible, you must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs). Those employees must have average wages of less than $50,000 a year. Basically, two half-time workers count as one full-timer. Here is an example, 20 half-time employees are equivalent to 10 full-time workers. That makes the number of FTEs 10 not 20. Thus a small business can have as many as 25 full timers or 50 half timer to be eligble for the credit. In addition, those employees must have average wages of less than $50,000 a year. Say you pay total wages of $200,000 and have 10 FTEs. To figure average wages you divide $200,000 by 10 – the number of FTEs – and the result is your average wage. The average wage would be $20,000.
Also, the amount the credit you receive works on a sliding scale. The smaller the business or charity, the bigger the credit. So if you have more than 10 FTEs or if the average wage is more than $25,000, the amount of the credit you receive will be less.
Small businesses cannot take a tax credit for insurance premiums paid for owners of the business. For small businesses structured as a C-corporation, no tax credit is available for employees who own 5% or more of the corporation. For S-corporations, no tax credit is available for employees who own 2% or more of the S-corporation. Source: Internal Revenue Code, section 45R, paragraph (e)(1).
Partners, members of LLC treated as a partnership, owners of a single-member LLC, S-corporation shareholders owning 2% or more of an S-corporation, and sole proprietors are all treated as self-employed persons for health insurance purposes, and are eligible for the self-employed health insurance deduction instead of the tax credit.
Small businesses should review their accounting systems to make sure they are keeping track of employer-paid and employee-paid health insurance premiums. This will become vitally important as employers will need to report the value of health insurance benefits on employees' W-2 Forms. Additionally, business owners will want to review how they structure their health benefits. For example, owners may want to revise what percentage of health insurance premiums they want to pay so as to be eligible for the tax credit.
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