An Overview of Small Business Healthcare Tax Credits

Thursday, September 29, 2022 17:28 Posted by Admin
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Many people say that running a business is expensive. But that really depends on the type of owner you want to be. It’s much cheaper if you don’t offer benefits.

Unfortunately, sacrificing employee benefits to save a few bucks means endangering your company’s future.

If you want to be a great owner and trusted leader, you must keep your employees happy, loyal, and productive.

But doing that will require at least some benefits.

In this respect, healthcare is something everyone wants. And many employees will gladly accept a lower salary in exchange for a great health care plan.

If that sounds too scary from a small business owner’s perspective, perhaps an overview of small business healthcare tax credits can put your mind at ease.

Small Business Healthcare Tax Credit Explanation

The small business healthcare tax credit is a provision of the Affordable Care Act which applies exclusively to small businesses.

Companies with 25 or fewer employees can access the sliding-scale credit for two consecutive tax years.

Similar to other provisions like special insurance options, the health insurance tax credit for small employers is given out based on specific requirements and calculated on the size of the employer.

But how does the small business health insurance credit help companies?

Using an employer health insurance tax credit enables companies to offset some of the healthcare premiums they must pay to give employees health insurance.

This is a great way to mitigate the financial toll of healthcare premiums for cash flow-struggling businesses, startups with limited capital, or companies trying to give employees more benefits as a recruitment or retention vehicle.

How to Get a Health Insurance Tax Credit for Small Employers

Employers can get this after providing a qualified health plan from the Small Business Health Options Program Marketplace or SHOP. A SHOP tax credit requires employers to pay 50% of the health plan cost.

But keep in mind that not every small business insurance plan will automatically make your eligible for the credit.

It also requires small business employers to retain under 25 employees, with full-time contracts and an average salary of under $55,000.

Claiming the credit can be done when filing business tax returns. Employers must attach Form 8941 with their tax returns to claim the credit.

Requirements of Health Care Tax Credit for Small Businesses

There are a couple of strict requirements for obtaining this credit. Meeting all of them is mandatory for small businesses.

Employment Requirements

The first main requirement to qualify for a SHOP marketplace tax credit is having no more than 25 full-time employees.

But what counts as a full-time employee (FTE)? According to the IRS, full-time employees are people working a minimum of 2,080 hours during a year.

If you only have full-time employees, doing the math should be easy. But what happens when your company has part-time workers?

Multiple part-time contracts can be added up. For example, two employees working 1,040 hours each per year count as one part-time employee.

Therefore, the employment requirements are looser than some small business owners believe. You can combine multiple part-time contracts to make a single full-time contract. In reality, your company can employ 50 or 100 employees and still qualify for a small business healthcare tax credit. It’s just a matter of meeting the full-time contracts requirement and staying under the 25 contracts limit.

Understanding Full-Time Employee Equivalents

As mentioned above, workforces comprised of part-time workers can still qualify for the health care tax credit. But the calculations are easy to get wrong without a few helpful tips.

One way to make your life easier is to track the total amount of hours each employee works, while accounting for sick days, holidays, and vacations.

Another way is to just count how many days employees give your company eight hours of service. If someone is a part-timer but spends 150 days working for you, they have a 1,200-hour contract. You would need someone who puts in no more than 880 hours per year to get a single full-time contract.

Calculating contracts based on 40-hour work weeks can also be used and perhaps be even more useful when managing a large workforce. Take an employee who puts in 45 weeks every year and has seven weeks off.

As long as those seven weeks are without pay, that employee counts as being on a 1,800-hour or part-time contract.

Whichever method you use, it’s essential to get to a maximum number of 24 full-time contracts. Another way to look at it would be that your total work contracts must have less than 25 x 2,080 = 52,000 hours.

The combinations of part-time contracts you use to get there won’t matter.

Salary Requirements

Another crucial requirement is the average salary. You can pay different employees however you see fit based on the number of hours worked, job description, experience, performance, etc.

But you mustn’t exceed an average wage of $55,000 across all departments.

Figuring out if you qualify shouldn’t be difficult. Simply divide the total salary paid by the number of full-time contracts. It’s important to understand that you have to divide the total by how many full-time employees you have, even if you have many people working for you on part-time contracts.

Otherwise, the result would be misleading.

Health Care Plan Requirements

The next essential requirement is buying a specific type of health care plan. The ACA requires small business owners to offer employees qualified health care plans.

These are only available in the SHOP. Other types of health care insurance plans might invalidate your claim for a small business health care tax credit.

Of course, you can’t claim the credit unless you pay for part of the plan. Paying 50% of the cost is mandatory if you offer individual insurance plans.

That said, if you give your employees family health care plans, the qualifying percentage is lower. As a business owner, you can still claim the credit if you just pay 50% of employee premiums.

What You Need to Know About Non-Employees

When counting the number of full-time employees, there’s one more aspect to consider. The health care tax credit for small businesses doesn’t take the owner and family members into account.

In fact, no spouse, children, siblings, parents, in-laws, uncles and aunts, and other relatives can qualify as full-time employee equivalents. The same goes for spouses of family members or anyone else that could be related to the small business owner.

Business partners, S-corporation shareholders with a stake higher than 2%, or owners with more than 5% business ownership also don’t qualify.

But what about insurance premiums paid for family members’ health insurance plans? These can’t be accounted for in any employer health insurance tax credit calculator for small businesses.

Small Business Health Options Program Tax Credit Value

The process of determining your company’s eligibility for claiming a small business healthcare tax credit is simple enough once you break it down.

However, if you crunch some numbers in a healthcare gov tax credit calculator, you might find that the value of your claim can differ a lot.

In some cases, the claim can help you make significant savings. In other situations, it may not be that substantial.

For the most part, a small business tax credit for health insurance is more significant for small businesses with no more than 10 full-time employees or the equivalent of that in part-time contracts and an average salary across the board that doesn’t exceed $27,000 per year.

Companies in this scenario can claim 50% of the insurance premiums paid.

Nevertheless, the percentage gets smaller as companies list more full-time employee contracts on payroll and the average salary increases.

Hitting the $55,000 average salary mark, employing 25 full-time workers, or the equivalent in part-time contracts will make your business ineligible for the claim.

You should also know that if your company has a small business tax-exempt status, you can’t claim a credit of more than 35% of the paid insurance premiums.

Another interesting limitation is set by average premiums. It’s a common misconception that paying more in premiums entitles small business owners to a bigger credit.

In reality, the deductions are based on the average premiums of the small business group market.

Imagine premiums of $6,000, of which the employer pays $3,000 to meet the 50% contribution requirement. Theoretically, that would qualify the employer for a $3,000 tax credit.

However, if the small group market has an average insurance premium of $5,000, the employer would only get a $2,500 tax credit.

This is crucial information to have before choosing an insurance plan and deciding how much to spend on premiums. Being overly generous can lead to overspending and might land some companies in financial hot water.

Who Should Get a Small Business Healthcare Tax Credit?

You ran the numbers through a small business health care tax credit calculator. You meet the requirements, but you don’t owe taxes.

Should you still try to claim the small business tax credit for small employers?

As long as you offer health insurance, there’s no reason not to claim the credit. First, it’s only given out for two consecutive years.

Even if your company is financially strong now, or you project another great year ahead, you should always try to improve your financial situation further.

There are no limitations regarding how much debt your company has or how profitable it is. Companies with no taxable income can also make the tax credit claim as it can be carried.

Switching to a new insurance plan could be another great reason to claim the tax credit. It can help offset part of the pricier premiums and give your company enough time to balance out the costs itself without dipping into its cash flow.

As always, if you’re not in a position to offer good health insurance without a tax credit, then it’s even better to claim it.

Denying employees the opportunity of getting on an employer health insurance plan isn’t good for business.

Workers want health care and retirement benefits. The more benefits you can offer to sweeten the pot, the easier it is to retain your star employees and attract new talent.

Satisfied employees are more productive too. Thus, by the time your small business is no longer eligible to claim the credit, you could be making enough money to self-sustain a health care plan.

When to Avoid the Small Business Healthcare Tax Credit

There are situations when you might want to stay away from claiming this type of credit. One of the most notable is when micromanaging the number of employees and salaries is too difficult.

Regardless of how flexible the eligibility criteria are, not all small businesses that could theoretically meet the requirements can do it with ease.

You must consult with a financial advisor or at least a CPA to determine if two years of tax credits would amount to substantial savings.

It could be detrimental to your overall business operations to change employee contracts, fire people, hire new staff, and make other roster and payroll changes just to qualify for a tax credit.

You can use plenty of other deductible expenses to make the company more profitable.

Do It Right

With the right approach, health insurance could be a benefit well within your reach and financial possibilities. And remember, this is one of the most attractive job perks you can offer to existing employees and new recruits.

Taking advantage of certain governmental incentives like a small business tax credit for health insurance is a reliable way of maximizing savings while still providing more value to your employees and improving their lifestyles.

If you need to find the best type of insurance plan to fit your company’s roster, don’t hesitate to make contact. Feel free to check out your flexible options and ask for guidance on choosing an ideal plan.

Written by Todd Taylor

Todd Taylor

Todd Taylor oversees most of the marketing and client administration for the agency with help of an incredible team. Todd is a seasoned benefits insurance broker with over 35 years of industry experience. As the Founder and CEO of Taylor Benefits Insurance Agency, Inc., he provides strategic consultations and high-quality support to ensure his clients’ competitive position in the market.

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