Valerie Koch is the Vice President & Chief Operating Officer of The Ganim Group in Bridgeport, CT.
One of the first provisions to become effective with the New Health Care Reform Legislation is the Small Business Tax Credit. Congress created the tax credit when it approved Section 1421 of the new Patient Protection and Affordable Care Act, which added Section 45R to the Internal Revenue Code. For tax years 2010 through 2013, small employers will receive a tax credit of up to 35 percent of the employer's contribution toward their employee's health insurance premium if the employer contributes at least 50 percent of the total premium cost, or 50 percent of a benchmark premium. The full credit will be available to employers with 10 or fewer employees with average annual wages of less than $25,000.
Starting in 2014, the maximum Section 45R tax credit will be 50% of the cost of coverage, IRS officials write in IRS Revenue Ruling 2010-13.
For purposes of this tax credit, a Small Employer is defined as an employer with no more than 25 full time equivalent (FTE) employees. A FTE employee is determined by dividing the total number of hours of service for which wages were paid by the employer during the taxable year by 2,080, rounded to the next lowest whole number. If an employee works in excess of 2,080 hours of service during any taxable year, the excess is not taken into account. Seasonal workers are excluded unless they work more than 120 days per year. Owners and family members are also excluded.
The employer's average wage amount is also relevant for determining whether a small employer is eligible for this tax credit. The tax credit applies to employers with an average annual wage amount of $50,000 or less for years 2010 - 2013. Subsequent years will be adjusted according to a cost of living adjustment. The average wage amount is determined by dividing the aggregate amount of wages which were paid by the employer to employees during the taxable year by the number of FTE employees.
Thus, an eligible small employer is one that has 25 or less FTE employees, with an average annual wage amount of $50,000 or less. In addition, the employer must contribute at least 50% of the total premium cost to be eligible.
To see if your business qualifies for this tax credit, click here.
The value of the credit to a specific employer will depend on the cost of the employer's coverage.
The table the IRS has published in Revenue Ruling 2010-13 is what the IRS believes to be the average cost of individual and family coverage in each state.
A copy of the IRS state average-cost table is available by clicking here.
Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit.
The IRS will use postcards to reach out to millions of small businesses that may qualify for the credit. More information about the credit, including tax tips, and answers to frequently asked questions, is now available on the IRS Web site, IRS.gov.
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