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Payroll Today

The small business health care tax credit: 7 tax tips for employers

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Alice Gilman

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in Payroll Today

If you’re a small employer that picks up the tab for at least half of employees’ health insurance premiums, you’re leaving money on the table. Under the Small Business Health Care Tax Credit, which is part of the Affordable Care Act, you can take a credit of 50% of the premiums (35% for nonprofit employers) on your corporate income tax return; nonprofits take the credit against the employer’s share of payroll taxes.

Take credit when credit is due

Lots of employers are missing out on this tax credit. A recent report from the Government Accountability Office (GAO), the investigative arm of Congress, concluded that only about 181,000 small employers claimed the credit during 2014. According to the GAO, there were 1.4 to 4 million small employers in 2014.

Here are seven tax tips about this credit:

1. Number of employees. You must have fewer than 25 full-time employees, or a combination of full-time and part-time employees. For example, two half-time employees equal one full-time employee for purposes of the credit.

2. Average annual wages. For 2015 (for your 2015 corporate return), the average annual wages of your employees must have been less than $52,000. The IRS adjusts this amount for inflation each year.

3. Half the premiums. You must have paid a uniform percentage of at least 50% of the cost of premiums for all enrolled employees.

4. Qualified health plan. Generally, you must have purchased a qualified health plan through the Small Business Health Options Program, or SHOP, Marketplace.

5. Two-year limit. You may claim the credit for two consecutive taxable years.

6. Tax forms to use. Use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. Small employers claim the credit on the annual income tax return. Small nonprofits claim it on Form 990-T, Exempt Organization Business Income Tax Return.

7. Credit carry forwards/carry backs. If the credit is more than your tax liability for the year, you can carry the unused credit back or forward to other tax years. If you are a small nonprofit employer, the credit is refundable, so even if you have no taxable income you may receive a refund (provided it doesn’t exceed your income tax withholding and Medicare tax liability for the year).

Changes coming?

The credit is too small to help the vast majority of small employers, according to Tim Huelskamp (R-Kan), who is the chair of the House Small Business Economic Growth, Tax and Capital Access Subcommittee. Huelskamp commented that there may be a bipartisan effort to revise the credit.

It’s not clear right now if there’s a legislative vehicle available to which a reformed credit can be attached. We’re keeping our eyes on it.

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