Business Deductions and Tax Credits
The Small Business Healthcare Tax Credit program targets small employers with up to 25 workers and is a key element of the Affordable Care Act (ACA). The intent of the program is to provide financial assistance to small business owners who today pay approximately $350 more for each employee’s health insurance than businesses with more than 50 employees. In California, it is estimated that more than 80 percent (approximately 456,500) of our small businesses are eligible for this tax credit.
Additionally, small businesses meeting certain criteria can claim the self-employed health insurance deduction.
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At a Glance
This section describes the Small Business Healthcare Tax Credit, provides guidance on how to determine if your business is eligible, and shares examples of how that tax credit will be calculated for years 2010-2013 and 2014. Although not related to ACA, general information about the self-employed health insurance federal tax deduction is also provided since it applies to many small employers.
Click on the following for more information:
- Small Business Tax Credit
- Determining Eligibility
- Self employed Health Insurance Deduction
- Additional Resources
Small Business Tax Credit
Beginning in 2010, businesses are eligible for the Small Business Healthcare Tax Credit if they meet the following criteria:
- Employ fewer than the equivalent of 25 full time employees
- Pay average annual wages of less than $50,000
- Pay at least half of the cost of health insurance for their employees
The credit is based upon a sliding scale and is capped using the average health insurance premium defined for the geographical area where the small business is located. The full credit is available to employers with 10 or fewer employees and average annual wages of less than $25,000. The credit phases-out as firm size and average wage increases. Employers are eligible to take the tax credit for two years.
The tax credit will be introduced in two phases:
- 2010 – 2013: eligible employers may receive a tax credit of up to 35% of the employer's contribution toward the employee’s health insurance premium.
- 2014 – beyond: eligible employers that purchase coverage through the state Exchange may receive a tax credit of up to 50% of the employer’s contribution toward the employee’s health insurance premium.[i]
Tax-exempt small businesses (not for profit): The same employee and wage requirements apply for tax-exempt small businesses, but the maximum tax credit is 25% of the employer’s contribution toward the employee’s health insurance premium for tax years 2010 to 2013, and up to 35% for tax years 2014 and later.[ii]
The U.S. Internal Revenue Service (IRS) has devised a three step process for determining if your small business is eligible for the Small Business Health Care Tax Credit.
Step 1: Determine if you employ fewer than 25 employees
Determine the number of Full Time Equivalents (FTEs) you employ. Employees who work full time are counted individually. Employees who work part-time are converted into FTEs by adding the total number of hours they were paid in the year and dividing that number 2080.
Step 2: Determine if the average annual wages of your employees is less than $50,000
Simply divide the total amount of wages you paid your employees (excludes owners) and divide that number by the number FTEs that you calculated in Step 1.
Step 3: Determine if you pay at least 50% of the insurance premiums using the average premium rate
This step requires that you determine the percent of the insurance premium that you’re paying for your employees. You will also have to compare your premium rate with the average premium rate calculated for the geographic area in which your business is located.
The average premium for the small group market is determined by the Department of Health and Human Services (HHS). After HHS sets the rate for a state it is published on the IRS website (www.IRS.gov).
For 2010, the rate for California is:
- Employee-only Coverage: $4,628 per year
- Family Coverage: $10,957 per year
Small Business Tax Calculator
See the tax calculator below to calculate your small business tax credit.
If you have self-employment income, then you can take a deduction for health insurance expenses incurred for yourself, your spouse, and your dependents if you meet the following criteria:
- Self-employed people reporting income on Schedule F (for farmers) or Schedule C (other self-employed persons).
- General partners in a partnership and actively participating members in an LLC treated as a partnership who have self-employed income.
- Employees of an S-corporation who own 2% or more of the s-corporation's stock.
[i] The Henry J. Kaiser Family Foundation. (n.d.). How are small businesses affected by health reform?. Retrieved from http://healthreform.kff.org/faq/how-are-small-businesses-affected-by-health-reform.aspx
[ii] Small Business Majority, Initials. (2010). Healthcare: tax credit study. Retrieved from www.smallbusinessmajority.org/hc-reform-faq-index.php (from hard copy - page now removed from site)