If you are a small employer and meet the following criteria, you might be eligible for the Small Business Health Care Tax Credit:
- You have purchased health coverage through the Small Business Health Options Program, i.e., the SHOP marketplace or qualify for an exception to this requirement.
- You have fewer than 25 full-time equivalent employees
- You pay an average wage of less than $50,000 per year
- More than half of employee premiums are paid by you
The credit maximum goes up to 50% of premiums paid for small business employers and 35% of premiums paid for small tax-exempt employers. This credit is available to eligible employers for two consecutive tax years. Even if you did not owe tax during the year, the credit can be carried backward or forward to other tax years. Plus, since the amount of the premium for health insurance is more than the credit total, eligible small businesses can claim a deduction for the premiums in excess of the credit resulting in a credit and a deduction for employee premium payments.
There is great news for small tax-exempt employers also. The credit is refundable! Even if you have no taxable income, you can still receive the credit as a refund as long as it does not exceed your income tax withholding and Medicare tax liability. However, do note that the refund payments issued to small tax-exempt employers are subject to sequestration. This means that refund payments processed on or after Oct. 1, 2014, and on or before Sept. 30, 2015, issued to a tax-exempt taxpayer claiming tax credit will be reduced by the fiscal year 2015 sequestration rate of 7.3 percent (regardless of when the original or amended tax return was received by the IRS).
You can benefit from the credit even if you didn’t place it on your 2014 tax return by filing an amended return. Usually, a claim for a refund must be filed within three years from the time the return was filed, two years from the time the tax was paid, or the period that expires later. For the tax years 2010 through 2013 the maximum credit is 35% of the premiums paid for small business employers and 25% of premiums paid for small tax-exempt employers like charities.
Contact your CPA if you have questions regarding this issue or need to file the necessary forms in order to receive this credit on your tax return. Thankfully there is some help for small business owners paying for medical insurance for their employees, and you want to be able to take this credit if it applies to you!