Small businesses may be missing out on an important new tax savings related to health insurance. The stakes are high in 2014, so DC area small businesses should take these health insurance tax credits into account when doing their financial and tax planning.
The Affordable Care Act provides a tax incentive for small business owners who pay at least a portion of their employees' health insurance. This year as much as 50% (up from 35% in 2013) of the employer's cost for worker health care premiums can be deducted as a tax credit. That's a dollar-for-dollar reduction in your 2014 tax bill.
Here are the specific tax planning rules that that you must follow in order to qualify:
- First, you must employ fewer than 25 full-time equivalent (FTE) employees.. A half-time employee would count as a .5 FTE, so you must consider all workers in your calculation. The fewer FTE employees you have, the higher the tax credit percentage.
- Second, the average annual wages of your employees must be less than $50,000. To make the calculation, you would take your total wages and divide by the FTE number you figured above. In most cases, the owner's salary is not included in the formula.
- Finally, the business owner must contribute at least 50% of the total cost for single coverage. Family coverage is not factored in. The policy must also be purchased through the Small Business Health Options Program, or SHOP to be eligible for the credit.
- If a business doesn't owe tax for the current year, it can apply the credit to past or future years. In addition, the excess of the employer's actual cost of health insurance over and above the credit received can still be deducted as a business expense.
- The new rules also mean that small nonprofit organizations can receive a tax credit of up to 35% of their health insurance costs if they meet the above requirements.
Originally published on February 13, 2014.