Small Business Tax Credits
Note: To be eligible for the maximum tax credit, employers must have average annual wages of no more than $25,000.
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 aggregate single premium cost for each enrolled employee.
Note: To be eligible for the maximum tax credit, employers must have average annual wages of no more than $25,000.
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.
Please note: beginning in 2014, the tax credit is only available to small businesses that offer coverage to their employees through the Small Business Health Options Program (SHOP).
Paychex Insurance Agency clients may use our free Small Business Tax Credit Package to help assess their eligibility and file for the credit.
When do I file for the small business health care tax credit?
The due date to claim the new small business health care tax credit is dependent on the business tax year end date and type of business.
- Sole proprietors and some partnerships filing Forms 1040
April 15 (April 18 as approved by IRS for 2012) deadline. The entities may also file for an extension.
- Corporations filing Forms 1120
The 15th day of the 3rd month following end of tax year (the business tax year may be different than the calendar year). These entities may also file for an extension.
- Non-profits filing 990T
The 15th day of the 5th month following end of the tax year (tax year may be different than calendar year). These entities may also file for an extension.
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. Tax-exempt businesses must use Form 8941 to calculate the credit and then may claim it on line 44f of IRS Form 990-T.
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:
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. Also, seasonal workers that work no more than 120 hours are not counted as part of the full time equivalent. Further details can be found at:
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.
What form can employers use to calculate the tax credit?
Small businesses, including tax-exempt organizations, can use the Credit for Small Employer Health Insurance Premiums form (Form 8941) to calculate the tax credit.
What form will tax-exempt organizations use to claim the tax credit?
Tax-exempt organizations will use a revised Form 990-T to claim the tax credit.
Are non-profit organizations eligible for the tax credit?
Yes, if the eligibility criteria are met.
Is there a mandate under Health Care Reform that will require employers to contribute more than 50% of the total employee premium cost for a plan to be qualified?
For an employer to be eligible for the small business tax credit, they must contribute at least 50% of the total premium cost for each employee enrolled in coverage. The requirement is based on single coverage only. When an employee has family coverage, the requirement is considered met for the employee if the employer pays at least 50% of what single coverage would cost for that employee.
I have three employees year round and 200 that work from April through September. Is my business subject to the provision of greater than 50 full-time equivalents? Am I required to provide insurance to these seasonal full-time employees or risk having to pay a penalty?
The provision of the health care law pertaining to employers providing health insurance coverage to their employees is not effective until 2014; needless to say, there has been no specific guidance issued on the exact implementation of it. As of today, this is what we know.
- Beginning January 1, 2014, employers with at least 50 full-time employees who do not offer minimum essential coverage to full-time employees and have at least one employee receiving federal premium assistance will be subject to a $2,000 annual penalty per employee. Also, if an employer does offer coverage to its full-time employees but also has at least one employee receiving federal premium assistance, the employer will be deemed as providing insufficient coverage and will be subject to the lesser of $3,000 for each employee receiving assistance or $2,000 for each full-time employee.
- For this provision, full-time is defined as working an average of 30 hours or more per week.
- The number of employees is calculated on a monthly basis.
- The first 30 full-time employees are excluded when calculating the annual penalty.
What is the maximum credit for a tax-exempt qualified employer?
For tax years 2010 through 2013, the maximum credit for a qualified tax-exempt employer is 25 percent of the employer's premium expenses. However, the amount of the credit cannot exceed: the total amount of income and Medicare (i.e., hospital insurance) tax the employer is required to withhold from employees' annual wages, and the employer's share of Medicare tax on employees' annual wages.
Will Paychex provide any assistance to clients who are eligible for the tax credit?
Paychex does not file business taxes. Clients should ask their tax preparer for help with calculating and filing for the credit. However, if the Paychex Insurance Agency handles the employees' health insurance enrollment applications and changes, clients can receive a free Small Business Tax Credit Package to help assess their eligibility and file for the credit (available for tax year 2012). Additionally, the Paychex Insurance Agency Small Business Tax Credit Estimator allows employers to enter basic information about their employees and receive an estimate of the tax credit they would receive for the coverage they have or are looking to purchase.