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Your Legal Corner - Client Alert Blog

Small Business Health Insurance Premium Tax Credit

Written By: Melissa C. Marsh, Esq., California Attorney, October 2010 Add to Favorites
The new health reform laws (Patient Protection and Affordable Care Act) enacted in March of 2010, give certain eligible small employers a tax credit if the employer provides health care coverage to their employees. The tax credit applies to employers with less than 25 full-time employees with average wages below $50,000 per year. To receive the tax credit, the employer must pay at least half the health insurance premiums for their employees and meet various other eligibility requirements which are highlighted below. Employers Eligible for the Credit. For an employer to qualify for the gtax credit,h the following requirements must be met:
  1. the employer must have fewer than 25 full-time equivalent employees;
  2. the employer must pay at least 50% of the health insurance premium for each employee enrolled in the employerfs health insurance coverage plan; and
  3. the average annual salary paid to the full-time employees must be less than $50,000.
The wages and hours paid to the owner of a sole proprietorship, partners in a partnership, shareholders owning more than 2% of an S corporation, and any owners of more than 5% of any other business, and the ownersf respective family members, are not counted in determining either the number of full-time employees, or the amount of the average annual wages, and the health insurance premiums paid on their behalf said individuals is likewise not counted in determining the amount of the tax credit.

It should also be noted that an employer with 25 or more employees may still qualify for the credit, if some of the employees work part-time. The tax credit is scaled based on the small organizationfs size. The full credit is available for employers with ten or fewer full time employees and average annual wages of $25,000 or less. The credit decreases as the number of employees and average annual wages rise, phasing out at 25 full]time employees with an average wage of $50,000.

Amount of the Tax Credit.

The tax credit will be phased in over two periods. For tax years 2010 through 2013, the maximum credit is 35 % (25% for nonprofit organizations) of the employerfs premium expenses. Beginning in 2014, the maximum credit is increased to 50% (35% for nonprofit organizations) of the employerfs premium expenses. Small business employers may claim the credit on their annual tax return on IRS Form 8941, Credit for Small Employer.

Calculating the Tax Credit.

To calculate the amount of the credit, only the premiums paid by the employer to a health insurance issuer are counted. For example, if an employer pays 75% of the premiums for each of its employees who have elected to be covered, with employees paying the other 25%, the 75% premium amount paid by the employer counts in calculating the credit.

There are various reductions and calculations that must be made to determine the actual amount of the credit that may apply, which goes beyond the scope of this post. Please see the IRSfs Small Business Health Care Tax Credit: Frequently Asked Questions for examples on how to make the appropriate calculations. Further information on the tax credit may also be found in the IRS Notice 2010]4.

This office does not provide Tax Advice. Please confirm this information with your CPA.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that, to the extent this post concerns any tax matter, it was not written to be (and may not be) relied upon to (1) avoid tax-related penalties under the Internal Revenue Code, or (2) promote, market or recommend to another party any transaction or matter addressed herein (or in any such attachment).

Tags: PPACA, tax credits, employer tax credit, health insurance tax credit, Patient Protection and Affordable Care Act
Posted In: Business Law Bulletin  Corporate Client Bulletin  Tax Update 

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Disclaimer: The information presented on this web site was prepared by Melissa C. Marsh for general informational purposes only and does not constitute legal advice. The information provided in my articles and alerts should not be relied upon, or used as a substitute for professional legal advice from an attorney you retain to advise or represent you. Your use of this Internet site does not create an attorney- client relationship. Transmission of this article is not intended to create, and receipt of it does not constitute, an attorney-client relationship. All uses of the contents of this site, other than personal uses, are prohibited. You may print or email a copy of any information posted on this web site for your own personal, non-commercial, use, but you may not publish any of the articles or posts on this web site without the Express Written Permission of Melissa C. Marsh.

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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.