Thursday, December 2, 2010

The Small Business Health Care Tax Credit: What You Need to Know

Earlier today, the IRS released the Form 8941 for qualifying employers to use when claiming the Small Business Health Care Tax Credit. The greatest beneficiaries of this credit will be companies employing 10 or fewer full-time equivalent employees earning an average of $25,000 or less (and pay at least half of the premiums for their employees' health insurance coverage). This credit is not indexed for the cost of living throughout the US, so it is likely that you won't see very many Los Angeles based employers receiving the maximum credit. The credit is phased out for companies employing 25 or more full-time equivalent employees earning an average of $50,000 or more.

The Instructions for Form 8941 were released today as well, and provide thorough guidance on qualifications for the credit and how to fill out Form 8941. Below are some points you shouldn't overlook:

  • Owners are Excluded: Owners of a sole proprietorship, partners in a partnership, shareholders who own more than 5% of outstanding stock or voting power in a C-Corp, shareholders who own more than 2% of an S-Corp, and people owning 5% of the capital profits interest in a non-corporation business are excluded from the credit. Their hours and wages are not averaged in, nor are their premiums considered.
  • Seasonal Employees: Bringing on some extra help at Christmas time? Well, those employees who work for you 120 or fewer days during a tax year are not included when figuring out average annual wages or hours. Premiums paid on their behalf may still be included when figuring out your total credit.
  • There is a Difference Between Employees and Full-Time Equivalent Employees: You will need to take out a calculator to figure out how many Full-Time Equivalent Employees you have. Start by adding up the total number of hours for all qualifying employees (see the Instructions for Form 8941 for more details on figure out that number). Next, divide the total hours of service by 2,080. Finally, round down to the next lowest whole number. Yes, round down. However, if the result is less than 1, round up to 1. 2,080 hours a year is the equivalent of one employee working exactly 40 hours a week. Why is this significant? See below.
  • Beware of Overtime: As noted above, if all of your employees received compensation for exactly 40 hours a week you would most likely end your calculation with a whole number. However, lets pretend you have 10 employees who each average 50 hours per week. According to the IRS, you would have 12 full-time equivalent employees. On the same note, if your same 10 employees each averaged 30 hours per week, you'd have 7 full-time equivalent employees.
  • Only Premiums Paid for Employees Count: Are you being generous and paying extra for your employees who wish to include their family under their coverage? While that is very nice of you, only amounts paid for your individual employees can be used for figuring out your credit.
  • High-End Insurance Options Don't Necessarily Lead to Better Credits: The IRS has kindly included a table in the Instructions for Form 8941 that indicates average coverage by state. If your premiums paid per employee exceed the state averages, your credit will be reduced.

To learn more about the Credit for Small Employer Health Insurance, please visit the links below:
Notice 2010-82
Form 8941
Instructions for Form 8941

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