Small businesses may be missing out on an important new tax perk related to health insurance. And the stakes are even higher in 2014.
The Affordable Care Act provides a tax incentive for small business owners who pay at least a portion of their employees’ health insurance. This year as much as 50% (up from 35% in 2013) of the employer’s cost for worker health care premiums can be deducted as a tax credit. That’s a dollar-for-dollar reduction in your 2014 tax bill. But as with most tax deals, you must meet certain requirements to qualify.
First, you must employ fewer than 25 full-time equivalent (FTE) employees. A half-time employee would count as a .5 FTE, so you must consider all workers in your calculation. The fewer FTE employees you have, the higher the tax credit percentage.
Second, the average annual wages of your employees must be less than $50,000. To make the calculation, you would take your total wages and divide by the FTE number you figured above. In most cases the owner’s salary is not included in the formula.
Finally, the business owner must contribute at least 50% of the total cost for single coverage. Family coverage is not factored in. The policy must also be purchased through the Small Business Health Options Program, or SHOP to be eligible for the credit.
A few more wrinkles: if a business doesn’t owe tax for the current year, they can apply the credit to past or future years. In addition, the excess of the employer’s actual cost of health insurance over and above the credit received can still be deducted as a business expense. And the new rules also mean that small nonprofit organizations can receive a tax credit of up to 35% of their health insurance costs if they meet the above requirements.