How to Claim the Credit for Small Employer Health Insurance
Reduce your business's tax liability by providing employee health insurance. This guide details how to correctly determine and claim this valuable federal credit.
The Small Business Health Care Tax Credit, enacted as part of the Affordable Care Act (ACA), provides a financial incentive for small companies that offer health insurance to their employees. Its purpose is to make providing health coverage more affordable by offsetting a portion of the premium costs. The credit is specifically targeted at smaller organizations, with rules designed to direct the benefit to those with the fewest employees and lowest average wages.
Eligibility Requirements for the Credit
To qualify for the credit, an employer must satisfy several conditions related to size, employee wages, and premium contributions.
- Fewer than 25 full-time equivalent (FTE) employees. An FTE is calculated by taking the total hours worked by all employees during the year and dividing that number by 2,080. For instance, two part-time employees each working 1,040 hours annually would count as one FTE.
- Average annual wages below an inflation-adjusted threshold. To determine this figure, the employer divides the total wages paid for the year by the number of FTEs. For example, a business with 10 FTEs and total annual wages of $450,000 has an average wage of $45,000.
- Payment of at least 50% of the premium cost for single, employee-only health insurance coverage.
- The health coverage must be a Small Business Health Options Program (SHOP) plan. These plans must be purchased through a SHOP-registered insurance agent or broker, or directly from an insurance company that offers them.
Calculating and Claiming the Credit with Form 8941
Calculating the credit requires gathering financial data from the tax year, including total employee hours, total wages paid, and the total health insurance premiums the business paid. This information is used to complete Form 8941, Credit for Small Employer Health Insurance Premiums, which is the IRS document used to figure the credit amount.
The maximum credit is 50% of premiums paid for small businesses and 35% for tax-exempt organizations. This is a sliding-scale credit that phases out as employee numbers and wages increase. The full credit is for employers with 10 or fewer FTEs and average annual wages of $33,300 or less. The credit amount is reduced if FTEs or average wages surpass this threshold, and it is unavailable if average wages reach $66,600.
For example, a business with 8 FTEs, average wages of $25,000, and $60,000 in premiums paid by the employer would initially calculate a potential credit of $30,000 (50% of $60,000). The final credit is limited by a comparison to the average premium for the small group market in the employer’s area, with the credit being the lesser of the two amounts.
If a business has more than 10 FTEs or higher average wages, the credit is reduced based on phase-out calculations detailed on Form 8941.
Finalizing Your Tax Return
After calculating the credit amount on Form 8941, the figure is carried to the business’s main tax return. The small employer health insurance credit is a component of the general business credit, so the amount from Form 8941 must first be transferred to Form 3800, General Business Credit.
From Form 3800, the credit is then reported on the employer’s primary income tax return. The specific form depends on the business structure; for example, a corporation would report it on Form 1120, while a sole proprietor would use their Form 1040. This final step integrates the credit into the overall tax calculation, directly reducing the amount of tax owed.
A qualifying small employer can only claim the credit for two consecutive taxable years. Careful planning is needed to ensure the business claims the credit in the two years that will provide the most benefit.