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Small Business Health Care Tax Credit

Helping Businesses Afford Required Insurance Coverage

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Updated April 05, 2010
The health care reform law - the Patient Protection and Affordable Care Act - provides an immediate small business tax credit to help small businesses afford health insurance coverage for their employees. Under the law, qualifying small businesses are eligible for a tax credit equal to 35 percent of the annual premiums it pays to provide its employees with health insurance coverage. In 2014, the tax credit rate will increase to 50 percent of total premium cost. The Internal Revenue Service (IRS) has provided the following details on the small business health care tax credit:

Eligibility
Must provide health care coverage: Qualifying employers must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.

Maximum business size: Qualifying employers must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible). The maximum credit goes to smaller employers -- those with 10 or fewer full-time equivalent workers (FTEs) -- paying annual average wages of $25,000 or less.

Average annual wages: Qualifying employers must pay average annual wages below $50,000 per employee.

Tax status: Both taxable (for-profit) and tax-exempt business are eligible for the small business health care tax credit.
Amount of Tax Credit
Maximum Amount of Credit: The credit is worth up to 35 percent of a small business' premium costs in 2010. On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers). Once again, the maximum credit goes to smaller employers -- those with 10 or fewer full-time equivalent workers (FTEs) -- paying annual average wages of $25,000 or less. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.
More Information
Eligibility Worksheet: The IRS provides a three-step worksheet to help determine if your small business or tax exempt organization qualifies for the small business health care tax credit.

Examples: Three scenarios from the IRS showing how the small business health care tax might apply to various businesses.

Questions and Answers: A detailed set of questions and answers from the IRS providing information on the small business health care tax credit.
The IRS has also announced that it will send explanatory post cards to millions of small businesses that may qualify for the credit.
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