New and small businesses maybe eligible for tax credits if they provide health care to their employees according to the Affordable Care Act approved by Congress in March and signed into law by the President. The small business health care tax credit, which is in effect this year, is designed to encourage small employers to offer health insurance coverage for the first time or maintain the coverage they already have.

In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees in 2010 and is specifically aimed to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers. For tax years 2010 to 2013, the maximum credit is up to 35% of premiums paid by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations.

Section 45R of the Internal Revenue Code (Code) determines with the following whether an employer is eligible for a credit under section 45R:

1. Determine the employees who are taken into account for purposes of the credit.

2. Determine the number of hours of service performed by those employees.

3. Calculate the number of the employer’s FTEs.

4. Determine the average annual wages paid per FTE.

5. Determine the premiums paid by the employer that are taken into account for purposes of the credit. Specifically, the premiums must be paid by an employer under a qualifying arrangement and must be paid for health insurance that meets the requirements of section 45R.

The maximum credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees –– paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 FTEs or more or that pay average wages of $50,000 per year or more.

Notice 2010-44 provides detailed guidelines, illustrated by more than a dozen examples, to help small employers determine whether they qualify for the credit and estimate the amount of the credit.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt organizations, the IRS will provide further information on how to claim the credit.

More information about the credit, including a step-by-step guide and answers to frequently asked questions, is available on the Affordable Care Act page.

Bookmark this page