Tools for your business
Helping you understand and calculate the tax credit
At a glance
Under the Affordable Care Act, businesses with 24 or fewer full-time-equivalent employees may qualify for a small business tax credit of up to 50 percent (35 percent for tax-exempt groups) to help them afford the cost of health care premiums. The tax credit is available to qualified small businesses that participate in the Small Business Health Options Program (SHOP). Small employers can claim the credit through 2013 and for two consecutive years beginning in 2014.
SHOP fact sheet
The maximum credit will be available to employers with 10 or fewer full-time-equivalent employees and average annual wages below $25,000. Businesses that receive state health care tax credits may also qualify for the federal tax credit. Dental and vision care also qualify for the credit.
What you need to know
The Affordable Care Act doesn't require small businesses to offer health insurance. Businesses may qualify for the small business tax credit if they:
- have 24 or fewer full-time-equivalent employees for the taxable year (for example, two half-time employees equal one full-time employee for purposes of the credit)
- pay annual wages that average less than $50,000 per full-time-equivalent employee
- provide at least 50% of the cost of health care coverage for their employees
Calculating full-time equivalents
To determine if you meet the threshold of 24 full-time-equivalent employees:
- Take the number of full-time employees who work at least 40 hours a week.
- Calculate the number of full-time-equivalent employees by dividing the total annual hours of your part-time employees by 2,080.
- Add these two numbers together to get your total number of full-time-equivalent employees.
You can also calculate your eligibility using the IRS Small Business Health Care Credit Estimator.*
How much is the credit?
For tax years 2014 and later, the maximum credit is:
- For-profit groups — 50% of the employer’s contribution
- Tax-exempt groups — 35% of the employer’s contribution
The maximum tax credit is only available to firms with 10 or fewer full-time employees and average annual wages of $25,000 or less. For businesses with 11 or more employees or average annual wages over $25,000, the credit is calculated as follows:
|11 or more employees
The maximum credit is reduced by 1/15th for each additional employee over 10.
For example, for a business with 13 employees, the credit would be reduced by 3/15ths.
|Average annual wages over $25,000
The maximum credit is reduced by 1/25th for each $1,000 in average annual wages over $25,000
For example, for a business with average annual wages of $29,000, the credit would be reduced by 4/25ths.
Also, the credit is capped based on the price of plans available to the employer. Employers will base their credit on either the premiums for their plan or the market average for small group plans in their state, whichever is less. This means that employers opting for more expensive plans will base their maximum credit on the premiums for an average plan in their state rather than their own plan’s higher costs.
Visit the IRS website for specific examples of how these adjustments to the tax credit are calculated.*
How do I claim this credit?
For-profit employers will claim the credit as a general business credit, which can be carried back or forward to other tax years. Employers can claim a business expense deduction for premiums in excess of the tax credit.
For tax-exempt employers, the tax credit is a refundable credit. Even if an employer has no taxable income, they may receive a refund.This calculation is based on factors including the employer’s income tax withholding and both the employer's and the employees’ Medicare tax withholding.
The tax credit is available to eligible employers for two consecutive tax years. Small businesses should first use IRS Form 8941 to calculate the credit and then include the amount of the credit as part of the general business credit on their income tax returns.
*Kaiser Permanente is not responsible for the content or policies of external Internet sites.
Although we have attempted to present accurate information, Kaiser Permanente disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it, and any responsibility to update this material for subsequent developments. As required by the IRS, we inform you that any tax advice contained on this site (or in any attachment) was not intended or written to be used or referred to, and cannot be used or referred to, (i) for the purpose of avoiding penalties under the Internal Revenue Code, or (ii) in promoting, marketing, or recommending to another party any transaction or matter addressed herein (or in any attachment). Users should consult with their own attorney or tax professional before making tax-related decisions.