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Understanding the small business health care tax credit

Most of the changes to the health insurance market brought on by Health Care Reform do not begin until 2014, but some have already started.  One of the more under reported changes already enacted is been the small business health care tax credit.  This blog post will help you understand this tax credit so you can determine if you are eligible for it and how much money it may save you.

What is a tax credit?

Unlike a tax deduction, which is the equivalent not being taxed on a specified dollar amount, a tax credit is an outright transfer of money, from the government to you, in the amount of the credit.

For example: With a $1,000 tax deduction, you would not pay taxes on $1,000 of your income.  If your marginal tax rate were 25 percent, this would mean you would save $250 in taxes, but if you had a $1,000 tax credit, then essentially the government would write you a check for $1,000. 

With a tax deduction, you save a percentage of the deduction (whatever your marginal tax rate is), because the government doesn’t take it away via taxes.  With a tax credit, you get all of that money.

Who is eligible?

  • Companies paying at least 50 percent of employee health insurance premiums (there are no requirements to pay for spouses and dependents).
  • Companies employing the equivalent of 25 or fewer employees.  In this case, the equivalent means that if a company has 50 employees, but they are all part time employees, the company may still qualify for the tax-credit because the total hours worked by 50 part-time employees may only add up to the equivalent of 25 full time workers.
  • Companies paying average annual wages of less than $50,000 per employee.  Some employees can make more than $50,000, but the average annual employee income must be below $50,000 to qualify.

How much is the tax credit worth?

Currently, the tax credit is 35 percent of the health insurance premiums paid by the employer.  That means that eligible employers will receive back 35 percent of the health insurance premiums they pay.

In 2014, the tax credit increases to 50 percent of health insurance premiums paid by the employer.

For Example: Under the current credit of 35 percent, an employer paying $10,000 per year towards employee premiums will receive back $3,500.

Applying for the tax-credit.

Speak with your tax professional to see if you are eligible for tax credit and how to apply.

The fine print.

As with all laws and IRS regulations, there is a lot of fine print associated with the tax credit.  Certain factors can lower the credit below the percentages listed above.  Learn more with this very detailed FAQ from the IRS.

Photo: Flickr, SmithGreg, Creative Commons Attribution No-Derivs 2.0 Generic