Small Business Tax Credits
Who is eligible for the tax credits?
Employers may be eligible for the tax credits if they:
- have fewer than 25 employees;
- have average annual wages of less than $50,000; and
- contribute at least 50 percent of the total premium cost for each enrolled employee.
Employers should check with their tax advisor for tax advice.
Do I qualify for the tax credits?
The Health Care Reform Act provides tax credits to small businesses that offer health insurance to their employees and meet the criteria listed in Question 1. Information available on www.irs.gov can help you find out if you may qualify. However, we recommend that you consult your tax advisor for assistance in performing the calculations needed to file for the credit.
How do I receive the tax credits?
Non tax-exempt employers eligible for the tax credits can take the credits on their annual income tax returns. The mechanism by which tax-exempt organizations will receive the credit has not been identified; further guidance is forthcoming from the IRS.
Can I use tax credits to offset my payroll taxes?
Tax credits cannot be used to offset payroll taxes for non tax-exempt organizations. Tax-exempt businesses can receive the credit it based on their Medicare and employee income tax withholding, although the IRS has not yet provided specific guidance on how this credit will be administered.
Does an employer have to contribute 50 percent of the employees' premium?
Yes, however, the contribution requirement of at least a uniform 50 percent of the employees' cost is based on the premium for single coverage only. When an employee has family coverage, the requirement is met if the employer pays at least 50 percent of what single coverage would have cost for the employee.
What does full-time equivalent mean?
Full-time equivalent (FTE) refers to either a full-time employee or more than one part-time employee as fractions of a single full-time employee. For example, you have two part-time employees each working 20 hours per week in a company where 40 hours is considered full-time. In this example, each part-time employee works 50 percent of a full-time employee. So, together the two part-time employees are the equivalent of one full-time employee. The IRS has issued guidance on how to calculate FTE including how to determine number of hours. Please refer to the following link:
http://www.irs.gov/pub/irs-drop/n-10-44.pdf
For a small business that has less than 25 employees, are all employees counted for the purpose of determining full-time equivalent or are there exceptions?
There are exceptions. For example, the calculation won't include business owners and their family members. The IRS includes the following in its definition of a family member: parent/step parent, child/step child, sibling/step sibling, aunt, uncle, niece, nephew, or in-laws. Further details can be found at:
http://www.irs.gov/newsroom/article/0,,id=223577,00.html
How often may an employer be eligible for the small business tax credits?
Eligibility for small business tax credits is determined annually through 2013 and is based on tax year full-time equivalents and wages. Employers must apply each year. In 2014, the credit increases, but it is limited to two consecutive years.
Where does a staffing agency fall as far as large or small employer if they have over 100 employees "active" but not all of them work every month?
Consult your legal counsel. There is no specific guidance from the IRS on staffing agencies. Keep in mind different provisions interact separately for valuing how to count employees.
We are a Paychex HR Solutions client; can we apply for the small business credit if we use Paychex' tax ID to report wages?
Shortly after the release of the bill, Senators Nelson (D-FL), Baucus (D-MT), and Grassley (R-IA) provided a communication regarding the intent of the Small Business Tax Credit as it pertained to clients of professional employer organizations (PEOs), such as Paychex HR Solutions. The communication stated that this credit should be made available to clients of the PEO. Based on this communication, it is our understanding that clients will be able to receive this tax credit; however, further clarification is needed regarding exactly how this credit will be applied. We are continuing to monitor this situation and will notify clients as more information is available.
Does health care reform affect employers who have less that 25 employees and currently do not pay any health insurance premiums?
There are additional reporting requirements (notably Form W-2 reporting), as well as notice requirements that most employers will be subject to, although the IRS has not yet provided specifics. The tax credits are also available for small employers as incentives for offering insurance.
How is turnover accounted for in counting full-time equivalents?
Per IRS guidance, the number of an employer's full-time equivalents is determined by dividing (1) the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080. The result, if not a whole number, is then rounded to the next lowest whole number. Certain employees are excluded from the count. See IRS FAQs for additional clarification at http://www.irs.gov/newsroom/article/0,,id=220839,00.html.
One of our companies within a group plan has less than 25 employees and less than $50,000 in average annual wages. They participate in a plan that is a group plan with at least five companies due to common ownership, but each entity files its own tax return. Would they qualify for the tax credit?
Per IRS guidance, members of a controlled group (e.g., businesses with the same owners) or an affiliated service group (e.g., related businesses of which one performs services for the other) are treated as a single employer for purposes of the credit. For example, all employees of the controlled group or affiliated service group and all wages paid to employees by the controlled group or affiliated service group are counted in determining whether any member of the controlled group or affiliated service group is a qualified employer. Consult your tax advisor to determine if you meet the IRS definition of a controlled or affiliated group.
Where do we access the state average insurance premium listing for each state?
The average premium per state is published on the IRS Website. It was released under IRS Revenue Ruling 2010-13. You can access it here: http://www.irs.gov/pub/irs-drop/rr-10-13.pdf.
If an employer chooses to reimburse employees for a portion of their individual contracts instead of forming a group, can this employer claim a tax credit?
No guidance is available at this time from the IRS.
If an employee does not participate in the employer-provided health plan, should the employee be counted in the FTE calculation for purposes of the tax credit?
For the purpose of the tax credit, the total number of full-time equivalent employees for the tax year is counted regardless of whether or not they are participating in the health coverage.
Are an owner's wages included in the calculation of FTE for purposes of the tax credit?
Generally, a sole proprietor, a partner in a partnership, a shareholder owning more than 2 percent of an S-corporation, and any owner of more than 5 percent of other businesses are not considered employees for purposes of the credit. The wages or hours of these business owners and partners are not counted in determining either the number of full-time equivalents or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.
If eligible for credit, can an employer apply it to previous or future years' tax liability?
For non tax-exempt organizations, the credit for a year offsets only an employer's actual income tax liability (or alternative minimum tax liability) for the year; however, as a general business credit, an unused credit amount can generally be carried back one year and carried forward 20 years. An unused credit amount cannot be carried back to a year before the effective date of the credit, so any unused credit amount for 2010 can only be carried forward.
If an employer is tax-exempt, can the employer receive a refund?
For a tax-exempt employer, the credit is a refundable credit, so even if the employer has no taxable income, the employer may receive a refund (as long as it does not exceed the income tax withholding and Medicare tax liability).
How will the credit work for flow-through entities such as S-corps?
Please consult your tax advisor for guidance.
Is the credit available for employee salaries at the $40,000 level?
The credit is based on average salary for the company not on an individual level. The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer to employees during the employer's tax year by (2) the number of the employer's full-time equivalents for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000). For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation). Certain employees are not counted as employees for purposes of determining the amount of average annual wages. For more information see IRS FAQs at: http://www.irs.gov/newsroom/article/0,,id=220839,00.html.