Tax Benefits of Offering Health Insurance as a Small Business

Health insurance is typically the 2^nd biggest expense behind wages.

With ever-increasing medical premiums it’s vital now more than ever to understand the tax breaks associated with offering insurance to your team.

This is not tax advice so we encourage you to reach out to an Accountant or tax professional to determine if your business qualifies for tax relief.

You could be eligible for the small business health care tax credit if:

· Your company has fewer than 25 full-time employees

· You cover at least 50% of your full-time employees’ premium costs at the employee-only tier

·  Pay average wages of less than an inflation-adjusted amount a year per full-time equivalent ($62,0000 in tax year 2023)

·  Offer a qualified health plan to employees through a Small Business Health Options Program Marketplace (SHOP)

The maximum credit is:

·   50% of premiums paid for small business employers

·   35% of premiums paid for small tax-exempt employers

·   The credit is available to eligible businesses for two straight taxable years

The credit amount received works on a sliding scale.

The smaller the business, the larger the credit.

If the business has more than 10 full-time employees or if the average wage is more than $25,000, then the credit amount received will be less.

For example, if an employer pays $50,000 a year toward employees’ health insurance premiums and if they qualify for a $10,000 credit each year, then they can save$20,000 over a two-year span.

Figuring Out Full-Time Employees for Health Care Tax Credit:

You’ll want to factor in all W2 employees who perform services for the business during the tax year when determining the number of your full-time employees in addition to average annual wages and premiums paid.

When making the full-time employee calculation, do not include the wages and hours worked of the specific types of employees mentioned below.

You also won’t include the premiums paid on behalf of these employees to calculate the amount of your health care tax credit:

·   Owner of a sole proprietorship

·   Partner in a partnership

·   Shareholder of S-Corporation, owning more than 2 percent

·   Owner of more than 5 percent of the business or other businesses

·   Family members of the above

For calculating the health care tax credit, one full-time employee generally equals 2,080 hours per year.

This is different from other provisions of the Affordable Care Act (ACA) that count 30 hours per week as one full-time employee.

Any number of part-time employees that work a combined number of hours equal to that of a full-time employee equals one full-time employee. For example, two part-time employees working 20 hours a week each equals one full-time employee working 40 hours a week.

Calculating average annual wages

If an employer’s total annual wages are $250,000 for 10 full-time employees, divide $250,000 by 10 to determine your average annual wage, which would be $25,000.

Next Step: Claiming the Health Care Tax Credit

Download Form 8941, Credit for Small Employer Health Insurance Premiums