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How to Take Advantage of the Small Business Health Care Tax Credit

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How to Take Advantage of the Small Business Health Care Tax Credit

By Meredith K. Olafson, SBA Official
Published: March 5, 2013 Updated: March 5, 2013

As the tax filing deadline approaches, we know that many small business owners are looking for ways to save money as they prepare to file their tax returns.  Although the Affordable Care Act does not require that businesses provide health insurance, it does offer tax credits for eligible small businesses that choose to provide insurance to their employees for the first time, or maintain the coverage they already have.

Does My Business Qualify for the Health Care Tax Credit?

Through 2013, to qualify for a small business tax credit of up to 35% (up to 25% for non-profits) of your premium contributions, you must have all of these criteria:

  • Fewer than 25 full-time equivalent employees
  • Pay average annual wages below $50,000
  • Contribute 50% or more toward your employees’ self-only health insurance premiums

Beginning in 2014, this tax credit increases to 50% (35% for non-profits) and will be available to small businesses who meet the criteria listed above and who purchase coverage through the new Small Business Health Options Program (SHOP) Marketplaces (also known as Exchanges).  This enhanced credit can be claimed for any two consecutive taxable years beginning in 2014 (or beginning in a later year) through the SHOP.                                                                                                               

If you need assistance determining whether your small business or tax exempt organization qualifies for the credit, the IRS offers a helpful step-by-step guide.

Who Will the Small Business Tax Credit Help Most?

While any business meeting the above standards may be eligible to receive a tax credit of up to 35% (25% for non-profits), the Small Business Health Care Tax Credit works on a sliding scale and is specifically targeted for those businesses with low- and moderate-income workers. 

For this reason, to qualify for the maximum small business tax credit, you must contribute at least 50% toward your employees’ self-only premium costs and meet the following two standards:

  • 10 or fewer full-time employees
  • Annual average wages at or below $25,000

How Do I Claim the Tax Credit?

Once you’ve determined that you qualify for the credit, your tax professional and the IRS can help guide you through the necessary steps to claim the credit which include:

  • Check with your tax professional; even if you are a small business employer who did not owe tax during the year, you may be able to carry the credit back or forward to other tax years.  And if you are a tax-exempt employer, you may be eligible for a refundable credit. 
  • Use  Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit.  It’s also important to know that eligible small employers can still claim a business expense deduction for the remainder of their premium contributions.
  • This is a federal tax credit.  Check to see if your state has additional health care tax credits available to small employers.

More information about the Small Business Health Care Tax Credit is available from the IRS. You can also refer to IRS’s Questions and Answers for more details about the credit.

About the Author:

Meredith K. Olafson

SBA Official

Meredith K. Olafson is Senior Policy Advisor for the U.S. Small Business Administration where she oversees the agency's education and outreach efforts around health care and the Affordable Care Act.

Comments:

So, to qualify for the 2014 Tax Credit - how long do I need to participate in a SHOP program? For example, my company's healthcare plan renews in Oct, will my business still qualify for the full 50% tax credit even though we only participated for Oct-Dec? Thank you.
good tips for small businesses, more like I know if my company can have the loan approved?
We meet the requirements to qualify, but we do not get our insurance through an exchange. In the past, the exchange has not been the best avenue for our employees. Do we have to go through an exchange to receive a tax credit?
  Thank you for your question.  Through 2013, the tax credit of 35% is available to small businesses that meet the three criteria discussed in this blog.  Beginning in 2014, the credit rises to 50% for for-profit employers, and is available to qualified small businesses that decide to purchase their coverage through the new Marketplace for small employers known as the Small Business Health Options Program (SHOP).  With SHOP, every small business owner will be able to access a single place to learn about health insurance and get accurate information on different plans; make apples-to-apples comparisons of the prices and benefits of private insurance plans for their employees; and, use their existing insurance broker to access the SHOP, or shop for plans themselves, without a broker—choosing a plan that works for their budget, their business, and their employees.  You can learn more about the Marketplaces by visiting www.HealthCare.gov.
We use to qualify for the Small Business Tax Credit but fortunately (or unfortunately?) our business has expanded to the point where we had to higher a couple more workers so I guess you could say our success is our own worst enemy... or, at least when it comes to this particular tax credit.
Thanks for your information, it is very useful to me

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