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IRS Form Helps Small Businesses Claim Health Care Tax Credit

By Stephen Miller  9/14/2010
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Update: On June 30, 2014, the IRS issued a final rule on the small business health tax credit, along with a set of Questions and Answers.

The U.S. Internal Revenue Service posted on Sept. 7, 2010, a draft version of Form 8941, which (when finalized) small businesses and tax-exempt organizations can use to calculate the small business health care tax credit when they file income tax returns in 2011. In addition, the IRS announced how eligible tax-exempt organizations —which do not generally file income tax returns—will claim the credit during the 2011 filing season.

Small businesses and tax-exempt organizations will use Form 8941 to calculate the credit. Then:

A small business will include the amount of the credit as part of the general business credit on its income tax return.

Tax-exempt organizations will claim the small business health care tax credit on a revised Form 990-T. The Form 990-T is currently used by tax-exempt organizations to report and pay the tax on unrelated business income. Form 990-T will be revised for the 2011 filing season to enable eligible tax-exempt organizationseven those that owe no tax on unrelated business incometo claim the small business health care tax credit.

The final version of Form 8941 and its instructions will be available before year-end 2010, according to the IRS release.

Small Business Encouragement

The small business health care tax credit was included in the Patient Protections and Affordable Care Act enacted in March 2010 and is effective for tax year 2010. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.

In 2010, the credit is generally available to small employers that contribute an amount equivalent to at least half the cost of single coverage towards buying health insurance for their employees. The credit is targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and low-income workers. The credit is to be implemented in two stages:

For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations.

Beginning in 2014, the maximum tax credit will go up to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible, tax-exempt organizations for two years.

Full-Time Equivalent Employees

The maximum credit goes to employers with 10 or fewer full-time equivalent (FTE) employees paying annual average wages of $25,000 or less.

The credit is phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 per year or more. Because the eligibility rules are based in part on the number of FTEs and not simply the number of employees, businesses that use part-time help might qualify even if they employ more than 25 individuals.

More information about the credit, including a step-by-step guide and answers to frequently asked questions, is available on the IRS web site. 

Stephen Miller is an online editor/manager for SHRM.

Related External Article:

Changes Coming in 2014 for Small Business Health Care Tax Credit, McGladrey, November 2013

Related SHRM Articles: 

Guidance on the Small Employer Health Care Tax Credit, SHRM Online Legal Issues, June 2010

IRS Publishes Guidance on Health Care Tax Credit, HR News, May 2010

IRS Reaches Out to Small Employers on Health Care Tax Credit, SHRM Online Benefits Discipline, April 2010

Quick Links:

SHRM Online Benefits Discipline

SHRM Online Health Care Reform web page 

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