Your small business is suddenly booming because you and your team are really awesome at what you do. To keep your team happy and productive—and because you care about them—you’ve decided to offer a group health plan. That’s great!
Even better, under the Affordable Care Act, your business could be eligible for a Small Business Health Care Tax Credit, which can help offset some of the costs of offering a group health plan—at least temporarily.
But there’s always a catch, isn’t there? In this case, the catch is that health care is so complicated we wouldn’t blame you if you just threw your hands up in disgust and gave up. Seriously, it’s like trying to read a foreign language in Braille.
But hey, you’ve come this far. And with a little bit of guidance, you’ll have your employees lining up to get flu shots and saving your business some money while they’re doing it.
What Is the Small Business Health Care Tax Credit?
The Small Business Health Care Tax Credit reduces the amount of taxes a small business owes when they provide health insurance to their employees for the first time from HealthCare.gov’s Small Business Health Options Program (SHOP).1 It offers a tax credit of up to 50% of premiums for small companies or up to 35% for small, tax-exempt employers.
Businesses that qualify can claim the Small Business Health Care Tax Credit for two years in a row—and that’s it. That’s because it’s designed to give a small employer some time to figure out how to pay for health insurance required by the Affordable Care Act.
In other words, a small employer gets two years to figure out how to fit health insurance for their employees into their budget. The credit gives businesses something of a cushion while they figure out how to offer an employee health benefit.
If you’re a small business looking to offer a group health plan and take advantage of the Small Business Health Care Tax Credit, talk with one of our independent insurance Endorsed Local Providers (ELPs) to help you navigate the plans offered in SHOP.
Who Qualifies for the Small Business Health Care Tax Credit?
The IRS lists three requirements that a business must meet to qualify for the credit:
1. You have to pay premiums for employee health insurance coverage under a qualifying agreement. What does that mean? Generally, it means you must pay at least 50% of each employee’s health insurance coverage. That percentage doesn’t apply to dependents, though, so if you contribute less than 50% to cover the rest of an employee’s family you can still claim the credit for those contributions.
2. You must have fewer than 25 full-time equivalent employees (FTEs) for the tax year. When the IRS says, “small business,” they mean small. And if your business only employs part-time employees, the IRS has a super easy formula for calculating the FTEs.
Just kidding. It’s the IRS, so it’s super complicated.
The IRS considers an FTE an employee who works 2,080 hours in a year. This is calculated based on a full-time employee working eight hours per day, for five days a week, for 52 weeks. Do the math, and you get 2,080 hours.
| Hours worked per day | Days worked per week | Weeks worked per year | Total hours worked |
| 8 | 5 | 52 | 2,080 |
The IRS lets you combine the hours worked by part-time employees into FTEs. You can also have both full-time and part-time employees included in the equation. As long as your total FTE count is fewer than 25, you’re good to claim the tax credit.
| Employees | Hours per day | Days per week | Weeks per year | Total hours |
| 2 | 4 | 5 | 52 | 2,080 |
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3. The average annual salary for those full-time employees cannot be more than $54,000 (this rate is indexed for inflation and changes from year to year).2 The full 50% credit is for FTE employees making $26,000 per year, and this percentage goes down as the salary goes up.
There’s also a table with the average health insurance premiums in each county, and you’ll want to make sure that the average annual premiums you are paying are below that amount.
Simple, right?
Have you stopped laughing yet? Okay. Let’s figure out how to make this work.
How to Claim the Small Business Health Care Tax Credit
So once you’ve decided to offer a group health plan to your employees, you can calculate and claim the credit using IRS Form 8941.3 The instructions form has a handy chart for listing your employees, the total hours they worked in the tax year, and how much you paid them. It’s super handy because it’s numbered 1–25, which is a helpful reminder that you can’t have more than 25 FTEs. If you have more than 25 part-time employees, you’ll have to use a separate sheet, and remember, the combination of part-time workers can’t go over 25 FTEs.
There’s one last thing. Employee salaries and benefits, including spending on health plans, is a common small-business tax deduction. However, during the two years that you claim the Small Business Health Care Tax Credit, you will subtract the amount you claim in the credit from what you’re claiming as a deduction. Once the two years are up, go back to claiming the full amount you spend on employee health care as a deduction.
Get a Pro to Help Guide Your Tax Planning
Your business is killing it. You’re an awesome leader and your employees love you, especially now that you’re offering a group health plan for them and their families. Keeping your team members healthy and happy is great way to keep them focused on serving your customers.
And hey, you may as well take advantage of the Small Business Health Care Tax Credit, because Uncle Sam takes enough of your earnings as it is. He doesn’t need any more of your hard-earned cash.
One of our small-business tax Endorsed Local Providers (ELPs) can help you decide if it makes sense to take the credit as well as help you fill out the proper forms, letting you concentrate on running your business.
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