BENEFITS, TAXES & LICENSES

Small Business Health Care Tax Credit

If you are a business owner who subsidizes all or a portion of your employee's health care coverage, you may be eligible to claim the Small Business Health Care Tax Credit, which can add up to as much as 50% of the employee premiums you pay. To be eligible you must have fewer than 25 full time equivalent employees, their average annual wages must be less than $50,000, you must pay on their behalf a uniform percentage of at least 50% of their health insurance premiums, and they generally must be enrolled in a qualifying health care plan offered through the Small Business Health Options Program (SHOP). The small business health care tax credit is part of the general business credit and can be claimed on your Form 1040.

REAL ESTATE AGENT

Daniel is an independent real estate agent with one full time employee who he pays $24,000 per year. Daniel also paid $5,000, or 100% of SHOP health insurance premiums on his employee's behalf. Since Daniel has less than ten full time equivalent employees, the average annual wage of his full time equivalent employees is less than $25,400, he did not receive any state tax subsidies or credits for his premium payments and his premium payments did not exceed the average small group market rate, he could claim the maximum credit of 50% of premiums paid, or $2,500. Note that if any of the aforementioned criteria were not true, the amount of Daniel's Small Business Health Care Tax Credit could have been reduced.

UBER DRIVER / RIDESHARE

David owns a small Uber fleet operation with one full time employee and eight part time employees. David pays his employees an hourly rate and as an added benefit provides all of them with health care coverage. David would like to take advantage of the Small Business Health Care Tax Credit but he isn't sure how many full time equivalent (FTE) employees he should include on Form 8941. David knows his full time driver worked 2,000 hours last year and his eight part time drivers worked a total of 4,890 hours. To determine the number of FTEs he should report, he simply needs to divide the total hours worked by 2,080 (IRS hours for one full time employee), or 2,000 + 4,890 = 6,890 / 2,080 = 3.31. Rounded down to the nearest whole number, David has 3 FTEs.

UBER DRIVER / RIDESHARE

In addition to calculating the number of FTEs David has, he also needs to calculate the average annual wage of his FTEs. Last year, his full time driver earned $55,000, while his eight part time drivers earned a total of $63,570. To calculate the average annual wage for Form 8941 David should complete the following calculation: ($55,000 + $63,570) / 3 FTEs = $39,523 average annual wage. Note that if the average annual wage for FTEs was over $50,000, he would not be eligible for the health care tax credit.

COURIER

Gary is a full time delivery driver for Postmates. He has no employees but enrolled in a health insurance plan through the Health Insurance Marketplace for Individuals and Families. Gary figured that since he enrolled in his plan through healthcare.gov, his business has less than 25 people (only him), and he made under $50,000 last year that he could take the health care credit on his Form 1040. What Gary failed to consider was that the IRS does not consider owners to be employees for calculating the Small Business Health Care Tax Credit. Accordingly, Gary is not eligible to claim this credit, he can however take advantage of the Self Employed Health Insurance Deduction.

TASKER

Rebecca is a carpenter who sources projects on TaskRabbit. Rebecca has one full time employee who is compensated with a salary of $43,000 per year and SHOP health benefits, for which the premium totals $4,000 per year. Rebecca's business pays for 70% of his health insurance. When Rebecca calculates her Small Business Health Care Tax Credit, she should only include $2,800 ($4,000 x 70%) of employee premiums paid on Form 8941, since her employee pays the remaining 30%. Note that Rebecca would also want to check how the total $4,000 premium compares to the average premium cost in her state, as this could impact her credit calculation.

MORE ON THE SMALL BUSINESS HEALTHCARE TAX CREDIT

Your total credit can be equal to as much as 50% of employee premiums paid. Keep in mind that you can only include the portion of employee health care premiums paid by you in your credit calculation. Do not include any premiums paid by your employees.
Generally, to determine the number of full time equivalent (FTE) employees you have, add the total hours worked by all of your employees (limited to 2,080 per person) and divide the total by 2,080. You can also use the calculator provided on the SHOP website (<-- https://www.healthcare.gov/shop-calculators-fte/). Note that you should not include yourself (the owner), your spouse, your family members or their spouses when determining how many FTEs you have. You can calculate average annual wages by dividing the sum of all wages paid to your employees by the number of FTEs you have.
There are certain limits that apply to the Small Business Health Care Tax Credit. For instance, you can only take advantage of the credit for two consecutive taxable years and that the amount of your credit will begin to phase out if you employ more than 10 FTEs or pay average annual wages greater than $25,400. Additionally, keep in mind that the small business health care tax credit is part of the general business credit, and therefore is subject to its constraints. Depending on what other general business incentive credits you take and your total tax liability, your health care tax credit in the current year may be limited.
To claim the credit, sole proprietors first need to calculate the value of the credit using Form 8941, then input the result from line 16 of Form 8941 onto line 4h of Form 3800 Part III, finally input the total from line 38 of Form 3800 Part II onto line 54 of Form 1040.
While the concept of the Small Business Health Care Tax Credit is straightforward there are many details behind the high level information we have outlined on this page. Additionally, there are a number of topics we do not cover (including rules for tax-exempt employers). You should refer to IRS guidance and consult with your tax advisor to determine how this credit can apply to you specifically.

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