The small business health care tax credit explained

Small business health care tax credit eligibility requirements

Naturally, there are several eligibility requirements for the small business health care tax credit for 2024 and beyond. These are as follows:

• Qualifying employers: Employers that qualify must offer a qualified health plan through a Small Business Health Options Program (SHOP) Marketplace and contribute at least 50% of the cost of employee health care coverage. If your small business is located outside of the United States, but does business in the US and meets the other requirements, it will qualify for the tax credit.
• Full-time equivalent (FTE) employees: If your business has fewer than 25 full-time equivalent employees, it may qualify.
• Annual average wages: You must pay out an average employee salary of $65,000 or less per year.

This sliding-scale healthcare tax credit is based on company size. The bigger your company, the smaller your potential tax credit. Additionally, the credit is available for two consecutive tax years. The maximum small business health care tax credit is 50% of premiums paid (35% for tax-exempt employers).

How to calculate the credit

You can use the tax credit estimator to determine if your small business is eligible. Once you have determined your eligibility, use Form 8941 to calculate your company’s actual tax credit.

• Understanding taxable income limits: The small business health care tax credit is highest for businesses with fewer than 10 employees with salaries that average $27,000 or less. Once employee salaries average $65,000 or higher, the credit no longer applies.
• Employee number considerations: Small is mighty when it comes to this tax credit. You receive a higher credit for fewer employees. For instance, you will get a bigger credit if your company has 10 employees than if it has 25. When it comes to calculating the credit, one full-time employee is equivalent to 2,080 work hours per year.

To see how the numbers come together, we asked Tom Brock, a licensed CPA and CFA charterholder, to run through an example of how the tax credit calculation works. The following sample scenario is for a small business with 10 employees, and the employer has chosen to cover half of their health insurance coverage.

Forms and documentation

In order to receive the small business health care tax credit, businesses need to submit Form 8941 and pertinent supporting documentation.

Overview of Form 8941

Form 8941, also known as the Credit for Small Employer Health Insurance Premiums form from the IRS, is a one-page form that ensures a small business pays for employee health insurance via the SHOP Marketplace. It requests the Employer Identification Number you use to report employment taxes. It also facilitates the calculation of your number of employees, annual average wages, premiums paid, and more to determine the amount of the small business tax credit you can claim.

Necessary supporting documents

In addition to Form 8941, the IRS may ask for supporting documents related to your employee count or annual average salaries.

Tax-exempt small businesses must also complete IRS Form 990-T for the tax credit.

Related tax breaks

In addition to the health care tax credit for small businesses, your organization may want to look into other tax breaks to help you recoup employee-related investments. A breakdown of notable credits is below.

Retirement plan establishment credits

Your business may be eligible for a tax credit of up to $5,000 for three years to support the costs of starting a qualified retirement plan. This can include a 401(k) plan, SEP, or SIMPLE IRA.

To be eligible for this credit, your business must have 100 or fewer employees who received at least $5,000 in compensation in the previous year and at least one plan participant who was a non-highly compensated employee.

To apply for this small business tax credit, complete Form 8881, the Credit for Small Employer Pension Plan Startup Costs. This verifies the number of employees, startup costs, employer contributions, and other relevant info.

Accessibility improvement incentives

In addition, your business can also look into federal tax incentives if you have recently made accessibility improvements for those with disabilities. This tax credit for small businesses covers organizations that have removed access barriers, provided accessible services, such as sign language interpreters, or taken other steps related to accessibility, such as modifying equipment or providing materials in alternative formats.

The small business tax credit is for organizations with 30 or fewer employees or $1 million or less in total revenues. It may provide up to $5,000 to offset the costs of accessibility improvements. You can receive this tax credit each year that you incur expenses related to accessibility, but you cannot use the credit for new construction costs.

Benefits of the Small Business Health Options Program (SHOP)

As outlined below, the Small Business Health Options Program (SHOP) offers several notable benefits for small businesses.

• The ability to better manage health care coverage for your employees as well as your contributions for premiums
• The ability to select from a variety of health insurance plans and update plans as needed —  including the option to offer health and dental coverage, collectively or individually
• The flexibility to start your company plan at any time

And of course, the small business health care tax credit is another great incentive for enrolling in a SHOP plan!