Small Business Tax Credits

Health Care Reform Provides Tax Credits to Certain Small Businesses That Offer Health Insurance

New laws will provide much-needed relief to small businesses across the country through tax credits. For the 2010 tax year, health care reform provides tax credits to eligible employers who offer health insurance to their employees.

If you already offer health coverage to your employees you may apply for a credit to offset the cost of premiums. If you don't currently offer health insurance you may now be able to afford it. Either way, now is a great time to try to take advantage of these tax credits. You can qualify for credits immediately! Any credit you qualify for will be applied against taxes owed beginning with your 2010 employer's annual income tax return. Guidance is still pending on how tax-exempt and non-tax-exempt entities will claim the credit. Small businesses can receive the credit not only for regular health insurance but also for add-on dental and vision coverage. Check with your tax advisor for the specifics on how this will affect your business.

Health Care Reform Tax Credits Are Effective in Two Phases

Phase 1: 2010-2013

Tax-Exempt Small Businesses

Full credit equals 25 percent of the lesser of the employer's contribution to health insurance or the amount employer would have contributed had they given the same uniform package based on the average premium for the small-group market in each state or geographic region.

Non-Tax-Exempt Small Businesses

Full credit equals 35% of the lesser of the employer's contribution to health insurance or the amount employer would have contributed had they given the same uniform package based on the average premium for the small-group market in each state or geographic region.

Phase 2: 2014 and later (credits limited to two consecutive years)

Tax-Exempt Small Businesses

Full credit equals 35 percent of employer's contribution to health insurance. Further guidance pending.

Non-Tax-Exempt Small Businesses

Full credit equals 50 percent of employer's contribution to health insurance. Further guidance pending.

Paychex Insurance Agency Can Help You:
  • Select an insurance plan if you don't currently offer health coverage.
  • Report premium amounts paid (for Paychex Insurance Agency's Insurance Payment Service [IPS] client).
  • Stay up to date as laws are clarified, regulations are developed, and guidance becomes available.

Example of Types of Employers Potentially Receiving the Credit (Courtesy of IRS.gov)

Tax credits are calculated based on premiums, employer contributions, and tax liability. Not every employer will qualify and not all that qualify will be eligible for the full credit. Your tax advisor can provide any needed tax advice.

Determining amount of premium payments for purposes of the credit

  • For the 2010 taxable year, an eligible small employer offers a health insurance plan with single and family coverage.
  • The employer has nine full-time equivalent (FTE) employees with average annual wages of $23,000 per FTE.
  • Four employees are enrolled in single coverage and five are enrolled in family coverage.
  • The employer pays 50 percent of the premiums for all employees enrolled in single coverage and 50 percent of the premiums for employees enrolled in family coverage (and the employee is responsible for the remainder in each case).
  • The premiums are $4,000 a year for single coverage and $10,000 a year for family coverage. The average premium for the small-group market in the employer's state is $5,000 for single coverage and $12,000 for family coverage.
  • The employer's premium payments for each FTE ($2,000 for single coverage and $5,000 for family coverage) does not exceed 50 percent of the average premium for the small-group market in the employer's state ($2,500 for single coverage and $6,000 for family coverage).
  • Thus, the amount of the premiums paid by the employer for purposes of computing the credit is $33,000 ([4 x $2,000] plus [5 x $5,000]).

Three Simple Steps

If you are a small employer (business or tax-exempt) that provides health insurance coverage to your employees, determine if you may qualify for the Small Business Health Care Tax Credit by following these three simple steps.

Step 1

Determine the total number of your employees (not counting owners or family members):
Full-time employees: (Enter the number of employees who work at least 40 hours per week.)
+ Full-time equivalent of part-time employees: (Calculate the number of full-time equivalents by dividing the total annual hours of part-time employees by 2080.)
= total employees. If the total number of employees is fewer than 25, GO TO STEP 2.

Step 2

Calculate the average annual wages of employees (not counting owners or family members): Take the total annual wages paid to employees:
÷ Divide it by the number of employees from step 1: (Total wages ÷ number of employees.)
= wages.

Step 3

You uniformly pay at least half the insurance premiums for your employees at the single (employee-only) coverage rate, then you may be able to claim the Small Business Health Care Tax Credit.

Thinking About Dropping Your Health Plan to Reduce Costs?

See if you qualify for tax credits first. With the tax credit, you may save enough to continue offering this benefit. Your employees will thank you.

Who Benefits the Most?

Smaller businesses with lower average wages will see the biggest tax credits. Eligible Employers:

  • Have fewer than 25 employees.
  • Pay average annual wages of less than $50,000.
  • Contribute at least 50 percent of the total health care insurance premium cost for each enrolled employee.* (Remember to save your premium payment records.)

Do You Have 25 or More Employees?

Eligibility rules are based in part on the number of full-time equivalent (FTE) employees, not the total number of employees, so businesses that use part-time help may qualify even if they employ 25 or more individuals.

*Based on 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 cost for that employee.

Paychex Insurance Agency Can Help

Paychex Insurance Agency is a full-service organization ready to provide guidance about small business tax credits and other provisions of health care reform. We help you:

  • Select an insurance plan if you don't currently offer health coverage.
  • Report premium amounts paid (for Paychex Insurance Agency's Insurance Payment Service [IPS] client).
  • Stay up to date as laws are clarified, regulations are developed, and guidance becomes available.

An essential partner to over 550,000 businesses nationwide, Paychex closely monitors legislation that affects our clients. With access to legislative and regulatory specialists in Washington, D.C., and utilizing expert, in-house sources of legal and compliance guidance, Paychex Insurance Agency will continue to provide the latest information on health care reform.

Paychex Insurance Agency is ready with the coverage you need, when you need it. To speak with a licensed insurance representative about the right plans for your business, your employees, and yourself, call 877-393-8868 or have an agent call you.

The Department of Health and Human Services and the Internal Revenue Service (IRS) continue to provide specifics and guidance on the Health Care Reform Act. Paychex will monitor these regulatory developments and provide updates as appropriate.

The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant. It is provided for informational purposes only. If you require legal or accounting advice, or need other professional assistance, you should always consult your licensed attorney, accountant, or other federally licensed tax professional to discuss your particular facts, circumstances, and business needs.

Insurance available through Paychex Insurance Agency, Inc. (formerly Paychex Agency, Inc.), 150 Sawgrass Drive, Rochester, NY 14620. CA License #0C28207.

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