The new health reform law includes a tax credit to help small businesses afford the cost of covering employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

Small employers that provide health care coverage to their employees and that meet certain requirements (“qualified employers”) generally are eligible for a federal income tax credit for health insurance premiums they pay for certain employees. In order to be a qualified employer, you must:

  • Have fewer than 25 full-time equivalent employees for the tax year (if some workers are part time, an employer with more than 25 employees may qualify)
  • Have average annual wages for employees for the year less than $50,000 per full-time equivalent employee
  • Pay the premiums under a “qualifying arrangement” described below

Companies with more than 25 employees: An employer with 25 or more employees could qualify for the credit if some of its employees work part time. For example, an employer with 46 half-time employees (meaning each employee is paid wages for 1,040 hours) has 23 full-time equivalent employees and therefore may qualify for the credit.

Seasonal workers: Seasonal workers are disregarded in determining full-time equivalent employees and average annual wages, unless the seasonal worker works for the employer on more than 120 days during the tax year. However, premiums paid by the employer on behalf of seasonal employees may be counted in determining the amount of the employer’s credit.

Family members working in the business: A family member of any of the business owners or partners, or a member of such a business owner’s or partner’s household, is not considered an employee for purposes of the credit. Thus, neither their wages nor their hours are counted in determining the number of full-time equivalent employees or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.

For this purpose, a “family member” is defined as a child (or descendant of a child); a sibling or step-sibling; a parent (or ancestor of a parent); a step-parent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law. In addition, spouses of certain business owners are not considered employees for purposes of the credit.

Specifically, the following spouses are not taken into account for purposes of the credit: the employee-spouse of a shareholder owning more two percent of the stock of an S corporation; the employee-spouse of an owner of more than five percent of a business; the employee-spouse of a partner owning more than a 5 percent interest in a partnership; and the employee-spouse of a sole proprietor.

Business owners working in the business: 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. Thus, the wages or hours of these business owners and partners are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.

International employers: For tax years beginning in 2010 through 2013, a qualified employer located outside the United States (including an employer located in a U.S. territory), which has income effectively connected with the conduct of a trade or business in the United States, may claim the small business health care tax credit only if it pays premiums for an employee’s health insurance coverage that is issued in and regulated by one of the 50 states or the District of Columbia.

For more information on how this credit applies to your situation, contact our Troy, Houston and Ft. Lauderdale CPAs.