The Treasury Inspector General for Tax Administration (TIGTA) has reported that few eligible small employers are claiming the health care tax credit, despite the IRS’ numerous public relations efforts.
Among the reasons given for the low take-up rate was that it took too long and it was too hard to claim the credit. Since there’s no sense in leaving money on the table, here’s what you need to know to successfully claim the credit.
Who qualifies. Employers that have fewer than 25 full-time equivalent employees (FTEs) and that pay at least 50% of employees’ health premiums can take the credit. Key: Employees’ contributions into cafeteria plans don’t count as employer-paid premiums for this purpose.
Through 2013, the maximum credit is 35%; beginning in 2014, the credit increases to 50% and will be available for two additional years. For nonprofit employers, the credit is 25% through 2013 and 35% beginning in 2014. The credit is reduced as employees’ average wages increase from $25,000 to $50,000, and as the number of FTEs increases from 10 to 25.
Figuring the credit. To determine FTEs, divide the total hours during the year for which employees are paid (up to 2,080 for any employee) by 2,080 and round down if necessary. Also, for each employee, count up to 160 hours of vacation pay and pay for other idle time. Employees excluded: seasonal employees, sole proprietors, partners, S corporation shareholders owning more than 2% of the corporation, business owners with more than a 5% stake and business owners’ family members.
• PART-TIMERS COUNT, TOO: Since employees are counted as FTEs, and not as actual employees, employers with 25 or more employees can qualify for the credit if some employees work part time. If the number of FTEs exceeds 10, determine the credit reduction by multiplying the credit by a fraction, the numerator of which is the number of FTEs that exceeds 10 and the denominator of which is 15.
FTEs’ average annual wages are determined by dividing total FICA wages paid by the number of FTEs, rounding down to the nearest $1,000. If average annual wages exceeds $25,000, the credit reduction is determined by multiplying the credit by a fraction, the numerator of which is the amount by which average annual wages exceed $25,000 and denominator of which is $25,000.
Example: For 2012, Mega Company’s portion of employees’ health premiums is $70,000. It has 12 employees who work 2,080 hours, three employees who work 1,040 hours and one employee who works 2,300 hours. To figure FTEs:
1. 12 employees working 2,080 hours (12 x 2,080) = 24,960.
2. Three employees working 1,040 hours (3 x 1,040) = 3,120.
3. One employee working 2,300 (1 x 2,080) = 2,080. Note: Only the first 2,080 hours count.
4. Total hours: 30,160 ÷ 2,080 = 14.50, or 14 FTEs.
Mega pays $425,000 in FICA wages. Average annual wages equal $30,357.14, or $30,357. Mega’s tentative credit is $24,500 (35% of $70,000). However, since Mega has more than 10 FTEs and average annual wages in excess of $25,000, it must reduce its credit.
1. Reduction for FTEs exceeding 10: $24,500 x 4/15 = $6,533.
2. Reduction for average annual wages exceeding $25,000: $24,500 x $5,357/$25,000 = $5,249.
3. Total reduction: $11,782.
4. Total 2012 tax credit: $24,500 – $11,782 = $12,718.
• CLAIMING THE CREDIT: The credit is claimed by attaching Form 8941 to your corporate tax return.
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