An important tax law change included in the recently passed Health Care legislation is the new health insurance tax credit for eligible small businesses. This break can potentially cover up to 35% of the cost of providing health coverage for employees.

Eligibility
To be eligible, the business has to have 24 or fewer full time-equivalent (FTE) employees, with an average wages of under $50,000 per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers. You, the business owner, must offer them group health insurance and pay at least 50% of their premiums. Health Insurance Tax Credit can be claimed by any type of business including C and S corporations, Limited Liability companies, partnerships and sole proprietorships.

Allowable Credit
The maximum allowable credit is 35% of the lesser of the two: the actual cost you have paid, or an imaginary ‘benchmark’ coverage in the small-group market as determined, state by state, by the Department of Health and Human Services.

If your company is paying less than 100% of the coverage, you can claim a credit only for the portion you have been paying, regardless whether the credit is based on actual cost or the imaginary benchmark cost.

Your company’s federal income tax deduction for employee health costs is reduced by the amount of the credit.

Phase-Out
As with almost everything else, there is a table and a phase out scale when the number of the employees increases and their salary goes up. The 35% credit applies in full if you have 10 or less employees, for example, and the average wages do not exceed $25,000. Under a complicated phase-out rule, the credit percentage quickly approaches zero as the number of employees approaches 25 and as the average wage approaches $50,000. As an example, if you have five employees and the average wage is $50,000 the credit you’ll get is zero.

The credit will only provide a meaningful benefit to truly small employers that pay truly modest wages.

Business Owners and Relatives
Certain business owners are considered “excluded workers” and the costs to cover them are disallowed from the calculation of the credit. Sole proprietors, partners, and more than 2% share holders of S corporation are considered excluded, as do those who have more than 5% shares in a C corporation. The same goes for employees that are related to them. Excluded workers are not counted in the number of employees and in the average salary amount.

Calculating Employees and Wages
Because of the phase out, it is very important to know how to calculate the employee hours and their wages. The government site at www.irs.gov provides good information when you click on the “businesses” portion.

The basic rule is to calculate the number of workers is by dividing the total hours by 2,080. However if a worker worked for more than those hours, you have to exclude those hours from the calculation. Seasonal workers who worked less than 120 days can be excluded as well. If the number you come up with exceeds 24, you might not be eligible for credit. But, your company can have over 24 employees and still qualify for credit as long as some of them are part time or seasonal employees.

To calculate average wages, divide the total employee wages by the number of employees you calculated. Exclude seasonal workers who worked less than 120 days. Then, round the amount to the next 1,000. That result is the average employee salary.

At the end of the day, after much thought and deliberation between the parties, the credit will only provide a meaningful savings to truly small businesses that pay modest wages.

Author Bio: Roy Fisher, CPA specializes in providing accounting and tax services to small business owners and professional practices in Houston, TX. For more information, go here: http://www.ledger-solutions.com

Category: Finances
Keywords: CPA, accountant, business advisor, outsourced accounting