Small Business Health Care Tax Credit

Learn about this important credit for smaller employers who provide health care for their employees through the Small Business Health Options Program (SHOP) Marketplace.

One important tax credit established by the Affordable Care Act (also known as Obamacare) is the Small Business Health Care Tax Credit. This credit has been around since 2010, but has undergone some significant changes since then. The credit is available through 2016.

Which Employers Qualify for the Credit

Smaller employers—those with 50 or fewer full-time equivalent employees in 2016 and later—are not subject to Obamacare’s employer mandate. In other words, they are not required to provide their employees with health insurance coverage. However, if they choose to do so voluntarily, they can qualify for the Small Business Health Care Tax Credit, which can substantially reduce their taxes.

To qualify for the credit, you must:

  • have no more than 25 full-time equivalent employees, not counting relatives (use the  Full-time Equivalent (FTE) Employee Calculator  to determine how many FTE employees you have)
  • offer coverage to all of your full-time employees (usually those working more than 30 hours per week)
  • pay your employees average annual full-time wages of no more than $50,000, and
  • pay at least 50% of the annual premiums for your employees’ health insurance.

In addition, small employers can obtain the credit only if they purchase their employees’ health insurance through a Small Business Health Options Program (SHOP) Marketplace. These are health insurance exchanges specifically designed for businesses with 50 or fewer full-time employees.

To qualify for the credit in most states, at least 70% of your full-time employees must enroll in your SHOP plan. Participation rates are calculated by dividing the number of employees enrolling by the number of employees eligible for coverage. You can use the  SHOP Marketplace Minimum Participation Rate Calculator  to see how many of your employees must accept your plan.

Finally, the tax credit is available to eligible employers for a maximum of two consecutive tax years. Thus, you can obtain the credit in 2016 if you claimed it 2015, but not in 2014 or earlier.

Using the SHOP Marketplaces

The SHOP Marketplaces are similar to the individual healthcare exchanges established for each state. You decide what type of coverage to provide and how much you will contribute toward your employees’ premiums. Employer and employee enrollment is handled online. You can enroll any month, any time of year. You can use an insurance agent or broker to help you enroll or handle it yourself. When you apply, you can search for agents and brokers registered to sell SHOP plans. For more information on the SHOP Marketplaces, see  Overview of the SHOP Marketplace  at Healthcare.gov

Amount of the Credit

Employers who qualify for the credit receive an amount equal to up to 50% of the premiums they paid for their employees’ health insurance. For example, if you pay $20,000 for employee health insurance in 2016, you could be entitled to a whopping $10,000 tax credit. The credit is based on a sliding scale. The credit is highest for employers with fewer than 10 employees who are paid an average of $25,000 or less. The smaller the business, the bigger the credit. You can find out exactly how big a credit you can qualify for by using the  SHOP Tax Credit Estimator.

If you do not owe tax for the 2016 tax year, you can carry the credit back or forward to other tax years. Also, you can take the credit and can still claim a business expense deduction for the health care premiums you paid in excess of the credit. That’s both a credit and a deduction for employee premium payments.

Obtaining the Credit for 2013 and Earlier

If you provided your employees with health insurance coverage during 2010-2013, you could have qualified for a 35% Small Business Health Care Tax Credit. During those years it was not necessary to purchase insurance through SHOP Marketplace to obtain the credit. If you qualified for the credit during past years, but failed to apply for it, you may be able to amend your tax return for the year or years involved and claim the credit. However, an amended tax return must ordinarily be filed no later than three years after the return for the year was filed.

If you have questions about the Small Business Health Care Tax Credit, refer to the  Small Business Answer page  at healthcare.gov.

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