Tax Credit Available for Small Business Employer Health Insurance
itemed by Administrator (admin) on Apr 22 2010 at 10:32 AM
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For tax years beginning after Dec. 31, 2009, there is a new tax credit for an eligible small employer for nonelective contributions to purchase health insurance for its employees. See below for charts on how much of a benefit your company may receive! 

 
An eligible small employer (ESE) generally is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.
 
The credit is a general business credit, and can be carried back for one year and carried forward for 20 years. The credit is available for tax liability under the alternative minimum tax.
 
Year the credit is available. The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. This is generally health insurance coverage purchased from an insurance company licensed under State law.
 
Calculation of credit amount. The credit is equal to the lesser of the following two amounts multiplied by an applicable tax credit percentage: (1) the amount of contributions the ESE made on behalf of the employees during the tax year for the qualifying health coverage and (2) the amount of contributions that the employer would have made during the tax year if each employee had enrolled in coverage with a small business benchmark premium. To calculate the contributions under the second of these two amounts, the benchmark premium is multiplied by the number of employees enrolled in coverage and then multiplied by the uniform percentage that applies for calculating the level of coverage selected by the employer.
 
The applicable percentage is 35% for tax years beginning after 2009 and before 2014. It is 50% for tax years beginning after 2013.
 
Tax-exempt 501(c) organizations are allowed the credit in a lesser amount (25% for 2010 through 2013 and 35% thereafter) against certain payroll taxes. For exempts, the credit takes the form of a reduction in income and Medicare tax the employer must withhold from employees' wages and the employer share of Medicare tax on employees' wages (with the credit thus limited by these amounts).
 
The credit reduces the employer's deduction under Code Sec. 162 for contributions.
 
Figuring the number of FTEs. The number of an employer's FTEs is determined by dividing (1) the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080. (Code Sec. 45R(d)(2)) The result, if not a whole number, is then rounded to the next lowest whole number.
 
Calculating average annual wages. The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer to employees during the employer's tax year by (2) the number of the employer's FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000. For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation).
 
Credit phaseout. If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced as follows (but not below zero).
 
*       If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction having as the numerator the number of FTEs in excess of 10, and having 15 as the denominator.
 
*       If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction having as the numerator the amount by which average annual wages exceed $25,000, and having $25,000 as the denominator.
 
In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the credit to which the employer is entitled. In guidance posted on its website, IRS has said that for an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the reduction is the sum of the amount of the two reductions. This sum may reduce the credit to zero for some employers with fewer than 25 FTEs and average annual wages of less than $50,000.
 

Small Business Tax Credit as a Percent (Maximum of 35%) of Employer
Contribution to Premiums, For-Profit Firms in 2010-2013
Average wage
 
 
 
 
 
 
 
Firm size
Up to $25K
$30K
$35K
$40K
$45K
$50K
 
 
 
 
 
 
 
Up to 10
35%
28%
21%
14%
7%
0%
11
33%
26%
19%
12%
5%
0%
12
30%
23%
16%
9%
2%
0%
13
28%
21%
14%
7%
0%
0%
14
26%
19%
12%
5%
0%
0%
15
23%
16%
9%
2%
0%
0%
16
21%
14%
7%
0%
0%
0%
17
19%
12%
5%
0%
0%
0%
18
16%
9%
2%
0%
0%
0%
19
14%
7%
0%
0%
0%
0%
20
12%
5%
0%
0%
0%
0%
21
9%
2%
0%
0%
0%
0%
22
7%
0%
0%
0%
0%
0%
23
5%
0%
0%
0%
0%
0%
24
2%
0%
0%
0%
0%
0%
25
0%
0%
0%
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