Amherst Chamber of CommerceAmherst Chamber of Commerce

Small Businesses May Be Eligible For Tax Credit

By Roberta Rifkin, Vice President, Government Affairs, Independent Health


Under the new Patient Protection and Affordable Care Act of 2010, small businesses may be eligible for a tax credit to provide health care benefits to employees.


The tax credit, which is effective immediately, can cover up to 35 percent of the premiums a small business pays to cover its workers. In 2014, the maximum rate will increase to 50 percent. This initiative allows small businesses to receive the credit not only for regular health insurance but, also for add-on dental, vision and other limited-scope health insurance coverage.


According to a report by Families USA and Small Business Majority, there are 349,500 small businesses in New York State, of which 285,000 or 81.6 percent may be eligible for the tax credit. The Congressional Budget Office estimates this tax credit will save small businesses $40 billion by 2019.


Eligibility Requirements:


-Fewer than 25 full-time equivalent (FTE) employees for the tax year

-Average annual wages of less than $50,000 per FTE

-Employer pays at least 50 percent of the single coverage (employee-only) premium cost for health plans, as well as stand alone vision and dental coverage.

Credit Amount


-Taxable Employers: up to 35 percent of the employer premium payments

-The maximum credit of 35 percent is available to employers with 10 or fewer FTEs and average wages up to $25,000.  The credit is phased out as the number of FTEs increases from 10 to 25 and as average employee compensation increases from $25,000 to $50,000. 

-Tax -exempt Employers: up to 25 percent of the employer premium payments

-Credit is based on the lower of the following:

-Actual premium paid by the employer, or

-The average premium paid by employers in the small group market in the state or sub-state area as determined by the Internal Revenue Service (IRS) For 2010, the IRS uses $5,442 for individuals and $12,867 for family coverage as the New York state average.

-State credits are NOT deducted when calculating the new federal credit.

2014 and beyond

-Taxable Employers: up to 50 percent of the employer premium payments

-Tax-Exempt Employers:  up to 35 percent of the employer premium payments

-State credits are not deducted when calculating the new federal credit

-After 2014, the tax credit is limited to two years.

Businesses can claim the credit for 2010 through 2013 and for any two years after that, for a total of six years. For those small businesses already providing health insurance in 2010, which may result in them not meeting all eligibility requirements, a special transition relief for tax year 2010 is available. The transition rules simplify the requirements for what constitutes a qualifying health insurance offer while maintaining the core requirement that an employer make a significant contribution to the employee's coverage.  In addition, if a for-profit business does not pay tax for a given year, the credit can be carried forward for up to 20 years. For tax-exempt businesses, the credit will be used to reduce income and Medicare tax that the employer is required to withhold from employee wages, along with the employer share of the Medicare tax. 


(This is only a summary of a certain provision of the Health Care Reform. This summary is not intended to be, nor substitute for, tax or legal advice. For additional information on the small business tax credit, determine eligibility or whether you qualify for special transition relief, please contact your accountant, legal counsel or health care benefit broker).


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