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 35 percent (25 percent for tax-exempt groups) to help them afford the cost of health care premiums. In 2014, the tax credit goes up to 50 percent (35 percent for tax-exempt groups) and 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 additional years beginning in 2014.
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 average annual wages below $50,000
- contribute 50% or more toward employee health insurance premiums
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 2010 to 2013, the maximum credit is:
- For-profit groups — 35% of the employer’s contribution
- Tax-exempt groups — 25% of the employer’s contribution1
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.
For 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.
2014 and on
For tax years 2014 and later, the maximum credit will increase to:
- For-profit groups — 50% of the employer’s contribution
- Tax-exempt groups — 35% of the employer’s contribution
Employers will generally be required to purchase coverage through a health insurance exchange to be eligible for the tax credit.2
How do I claim this credit?
For-profit employers will claim the credit as a general business credit, which can be carried forward up to 20 years or back one year — with the exception of the 2010 tax year. For tax year 2010, eligible small businesses may carry back unused general business credits (including the small employer health care tax credit) for up to five years.
For tax-exempt employers, the tax credit is a refundable credit. This calculation is based on factors including the employer’s income tax withholding and both the employer's and the employees’ Medicare tax withholding.
Eligible 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.
1 Automatic cuts in federal programs, referred to as "sequestration," began on March 1, 2013. These required cuts include a reduction to the refundable portion of the small business tax credit for certain small tax-exempt employers, resulting in the refundable portion of their claim being reduced by 8.7 percent. The sequestration rate will be applied until the end of the fiscal year (September 30, 2013) or intervening congressional action, at which time the sequestration rate is subject to change.
2 The U.S. Department of Health and Human Services recently began referring to exchanges as health insurance marketplaces. Throughout this document, we refer to the more widely known term of exchange.
Although we have attempted to provide the most current information, we can’t guarantee its accuracy or completeness. This document, including the small business tax calculator, is provided for informational purposes only and should not be construed as financial, legal, or operational advice, or as establishing a privileged attorney-client relationship. You must consult and rely solely upon your own independent professional advisors regarding your particular situation and the concepts presented herein. 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. Pursuant to IRS regulations, we are required to notify you that any advice contained on this Web page that concerns federal tax issues was not intended or written to be used, and cannot be used, to avoid tax-related penalties under the Internal Revenue Code, or to promote, market, or recommend to another party any matters addressed herein. Users should consult with their own attorney or tax professional before making tax-related decisions.
* Kaiser Permanente is not responsible for the content or policies of external Internet sites.