Starting in 2014, small businesses can earn a significant tax break if they provide health insurance benefits to their employees. The Affordable Care Act (ACA) health care reform law established the tax credit to encourage more small businesses to provide health benefits.
The tax credit is worth up to 50% of an employer’s contribution toward employees’ premium costs (up to 35% for tax-exempt employers). To qualify, a small business must:
- Have fewer than 25 full-time equivalent employees making an average of $50,000 a year or less
- Pay at least 50% of full-time employees’ premium costs (coverage need not be offered to part-time employees or employees’ dependents)
- Buy coverage through the state-based insurance exchanges established under the ACA.
The tax credit is highest for companies with 10 or fewer employees who earn an average of $25,000 or less. The smaller the business, the bigger the credit. Here’s an example, for an employer with 10 employees and a $250,000 annual payroll, which qualifies for the maximum 50% credit in 2014:
- Employer contribution to employee premiums: $70,000
- Tax credit amount: $35,000 (50% of employer’s contribution).
You don’t have to wait until open enrollment on Oct. 1, 2013, to find out if you qualify for the small business health care tax credit. The IRS offers a complete description of how the tax credit works, or call (800) 706-7893.