What You Need To Know About The Small Business Health Care Tax Credit

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What You Need To Know About The Small Business Health Care Tax Credit

Apr 29, 2010

Posted by Kristie Arslan - Have you checked your mailbox lately?  If so, you may have noticed a postcard from the IRS indicating that if you have a small business, you may be eligible for the Small Business Health Care Tax Credit. Many small business owners and self-employed individuals are confused about what assistance is now available to help pay for health coverage since the health reform legislation has become law.  Here is some guidance on whether you can expect to see any benefit from reform.

Small Business Health Care Tax Credit 

This new tax credit kicks in immediately and is available until 2014.  Answer the questions below to find out if you qualify:

1) Do you have fewer than 25 employees? 

2) Is your average annual wage less than $50,000?

To calculate this, add up the salaries of all your full-time employees and divide that number by the total number of employees.  For example, Joe's Painting Co. has three employees, each of which make the following annual salaries - $25,000, $32,000, and $45,000.  We add those amounts, which equals $102,000, and divide that by three (3) which is the total number of employees.  We find that the average annual salary of Joe's Painting Co. is $34,000.

3) Do you pay at least 50% of the cost of health coverage for your workers?

If you answered yes to ALL the above questions, then you are in luck!  You are eligible for the Small Business Health Care Tax Credit.  

For additional assistance in determining whether you qualify, take a look at this IRS worksheet

So how much of a tax credit do you get?  Of course, as we have come to expect, nothing created by Congress and implemented by the federal government is ever simple and easy.  The maximum amount of the tax credit you can receive is 35% of the total amount you spend on health care costs for your employees.  For example, if you are spending $30,000 per year on your employees' health care, then you can receive a credit worth $10,500 ($30,000 X 35% or .35) on your taxes. 

However, as I mentioned, it is not so simple.  The only segment of small business that can qualify for the full credit, the total 35%, must have:

  • fewer than 10 full-time employees  AND
  • an average annual wage of $25,000 or less

If you have between 11 and 25 full-time employees and/or have an average annual wage of up to $50,000, you will only receive a portion of the Small Business Health Care Tax Credit. 

To help you determine the amount of the Small Business Health Care Tax Credit for your business, visit these helpful tax credit calculators:

Other Important Characteristics of the Tax Credit

As I mentioned earlier, if you qualify you can receive this Small Business Health Care Tax Credit through 2014.  In 2014, in order to continue receiving a credit to help cover your health care costs, you will have to drop your existing group health coverage and purchase coverage in the newly created health marketplace in your state, known as the Exchange.  If you don't mind shopping for new group coverage for your business and employees, then you can receive the tax credit for an additional two years and the amount of the credit increases from 35% of your total costs to 50%.  After the two additional years, you would no longer be eligible for a tax credit to help with your business' health care costs. 

What about the Self-Employed?

We have talked about those small businesses who could qualify for the new tax credit.  You may ask, who has been excluded from taking advantage of the new credit?

If you fit into one of these categories below, unfortunately you are not eligible for the new tax credit:

  • You are self-employed, defined as a one-person business
  • If your spouse, a child, other family members or relatives work in your business
  • If you have more than 25 full-time employees
  • If your average annual wages per employee is more than $50,000. [See above on how to calculate this figure.]

For those who are in that first category - self-employed - there is a glimmer of relief in the future.  The self-employed can qualify for premium subsidies for individuals and families once they take effect in 2014.  To qualify, you must make below a certain level of income.  An individual must make below $43,340 and a family of four must have a household income below $88,200 to qualify for the assistance.   

Here is a helpful calculator to determine how much help with your health care costs you may receive in 2014:

With the self-employed representing 78 percent of all small business in the United States, it is a shame that they have to wait so long for help with skyrocketing health care costs.


Here are some other helpful resources regarding the Small Business Health Care Tax Credit:


The opinions expressed in our published works are those of the author(s) and do not necessarily reflect the opinions of the National Association for the Self-Employed or its members.

Courtesy of NASE.org