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Qualification Steps for the Small Business Health Care Tax Credit


An employer must have fewer than 25 full-time employees with an average income of less than $50,000 to begin the qualification process for the small business healthcare tax credit. In addition, the employer must pay for at least 50% of the insurance premiums through a “qualifying plan”. In the event of a multi-employer plan, contributions will be treated as payment of premiums for the purposes of credit, however, 100% of the coverage cost has to be paid by the employer as opposed to split between the employer and employee.

Year By Year Breakdown

Between 2010 and 2014, the tax credit amounts are capped at certain percentages of eligible premiums. For the first three years, 35% of premiums are eligible, and starting 2014, 50% of premiums will be eligible.

Are Owners Eligible?

Small businesses are not eligible to take a tax credit for any insurance premiums paid towards the owner of the businesses, which affects corporation owners, partnership members, and sole proprietors. If the business is instead set up as a C-corporation, tax credits are not available for any employees owners more than 5% of the corporation. Those businesses set up as an S-corporation cannot claim a tax credit for any employees owning 2% or more of the company.

Claiming the Credit

The Health Care Tax credit can be received by filing Form 8941 and submitting this form with the business’s tax return. It’s important to remember that the credit will not reduce or clear any payroll tax or self-employment tax and the credit is nonrefundable.

Preparing for the Credit

It’s critical that a plan is in place to track any employee payments towards health insurance premiums and the employer contributions towards health insurance premiums. Since the numbers are very important for receiving the credit and for overall payroll, getting this system organized earlier is definitely to the benefit of the business owner. If the business owner wants to make sure that the company is eligible for the healthcare tax credit, their records should be reviewed to make sure that the three criteria mentioned above are all being met. An in-depth review with an accountant or payroll expert can help to uncover the best possible scenario.