The Small Business Healthcare Tax Credit has been expanded for 2014. The original credit, which dates back to 2010, provided employers with up to a thirty-five percent tax credit for health insurance premiums paid for their employees, provided other requirements were met. In August of this year, the Internal Revenue Service proposed new regulations for small employers that offer insurance coverage to their employees and pay a uniform percentage of at least fifty percent of premiums. The credit is available to employers with fewer than twenty five full-time equivalent employees whose annual wages are less than $50,000.
Beginning on January 1, 2014 the Small Business Healthcare Tax Credit is increased from 35 percent to 50 percent of the amount of aggregate employer contributions to employee health coverage; however the coverage must now be purchased through a SHOP Marketplace (aka the SHOP Exchange or Small Business Health Options Program). It should be noted that due to delays, the SHOP won’t be accessible through the marketplace until November 1, 2014. Small businesses can still apply for SHOP plans through paper applications.
As in previous years, the credit will phase out based upon the number of FTEs in excess of 10 and average wages exceeding $25,000. Average wages are determined by dividing aggregate wages by the number of the employer’s FTEs and round to the next lowest $1,000. Also, the credit will now be limited to two consecutive years, beginning with the first year in which the employer (or any predecessor) offers health coverage through a SHOP Marketplace. Prior to 2014, the credit was available for coverage arranged outside of a SHOP Marketplace. Employers who take the tax credit prior to 2014 are still eligible for the credit for two years.
In general, all employees, who perform services for the employer during the tax year, are taken into account in determining FTEs and average annual wages. However, certain individuals are not considered employees, when calculating the credit. Hours and wages of these individuals are not counted when determining an employer’s eligibility for the credit. For example, independent contractors, sole proprietors and partners are excluded, as are shareholders owning more than two percent of an S corporation; owners of more than five percent of other businesses; and family members of owners and partners, spouses and any persons who are listed as dependents on the individual income tax return of an excluded individual. There are also special rules for seasonal employees who work for 120 or fewer days during the year.
The credit is calculated on IRS Form 8941, “Credit for Small Employer Health Insurance Premiums,” which can be applied against both regular and alternative minimum tax. As these regulations continue to evolve and become more complex, be sure to speak with your accountant throughout the year to ensure that you meet the requirements to take advantage of this credit.