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Introduction

The Taxpayer Advocate Service developed the Small Business Health Care Tax Credit Estimator to help you find out if you might be eligible for the Small Business Health Care Tax Credit and how much you might receive.

What is the credit?

If you are an eligible small employer, the Small Business Health Care Tax Credit can help you provide health insurance coverage to your employees. The credit can be up to 50% of the premiums you paid for health insurance coverage under a qualifying arrangement, or, if you’re an eligible tax-exempt employer, up to 35% of premiums you paid.

You are an eligible small employer for the tax year if you meet these three requirements:

  1. You paid premiums for employee health insurance coverage that you purchased through the SHOP Marketplace under a qualifying arrangement.
    • The SHOP Marketplace is open to employers with 50 or fewer full-time equivalent employees (FTEs). This includes non-profit organizations.
    • The FTE calculation for qualifying for the SHOP Marketplace is based on a 30-hour week unlike the FTE calculation for the credit, which is based on a 40-hour week.
  2. You had fewer than 25 full-time equivalent employees (FTEs) for the tax year. If some of your employees are part time, you may be able to meet this requirement even if you had 25 or more employees.
    • The FTE calculation for eligibility for the credit is based on a 40-hour work week (2,080 hours divided by 52 weeks). To help determine if you are eligible for the credit and estimate the amount, the Estimator uses this 40-hour work week FTE calculation.
    • If some of your employees are part time, you may be able to meeet this requirement even if you had 25 or more employees.
    • The credit will begin to phaseout if you have more than 10 FTEs.
  3. For 2015, you paid average annual wages for the tax year of less than $52,000.
    • Wages, for this purpose, mean wages subject to Social Security and Medicare tax withholding determined without considering any wage base limit.
    • The credit will begin to phaseout if you paid average annual wages of more than $25,000.
    • If an individual is not considered an employee or is an excluded employee, his or her wages do not count. Eligible employees and excluded employees are discussed in The Credit section.

For tax years 2014 and forward, the credit is only available to you for two consecutive years beginning with the first year you claim the credit. This does not include 2010 through 2013.

How does the credit work?

You must use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate your actual credit. For detailed information on filling out this form, see the Instructions for Form 8941.

If you are a small business, include the amount as part of the general business credit on your income tax return.

If you are a tax-exempt organization, include the amount on your Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don't ordinarily do so.

What is the SHOP Marketplace?

The SHOP Marketplace is an online health insurance marketplace where you can shop for and purchase insurance to offer to your employees.

To get more information about the SHOP Marketplace and the eligibility requirements, visit Healthcare.gov.

What is the Estimator?

This tool is intended to help small employers and practitioners determine if they are eligible for the credit and estimate the amount.

However, this estimator does not determine:

  1. Whether the health insurance coverage you offer is an eligible plan, nor
  2. Which of your employees are considered employees for purposes of determining the credit.

Information You Need to Use the Estimator

To use the estimator, you'll need certain information, including:

  1. Information about your employees (including total hours worked and total wages)
  2. Information about the insurance costs you pay on behalf of your employees

You can get more information and IRS resources at Small Business Health Care Tax Credit for Small Employers and from the Affordable Care Act Tax Provisions.

Remember

This tool may help you determine if you are eligible for the credit and estimate the amount. Because this tool can only provide an estimate, to determine the Small Business Health Care Tax Credit, you must complete Form 8941 and attach it along with any other appropriate forms and file it together with your tax return.

Please read all the information provided before starting the estimator. It is intended as a guide to help you with the estimator and understand the credit.

Start

KEY TERMS

Eligible Employees

In general, all employees who perform services for you during the tax year are taken into account in determining your FTEs, average annual wages, and premiums paid.

You can generally calculate your FTEs by adding up the hours of service for all of your employees and then dividing that by 2,080 (which is a full time employee - 40 hours a week at 52 weeks per year).

Former Employees

Premiums paid on behalf of a former employee with no hours of service may be treated as paid on behalf of an employee for purposes of figuring the credit provided that, if so treated, the former employee is also treated as an employee for purposes of the uniform percentage requirement.

Leased Employees

Do not use premiums paid by the leasing organization to figure your credit. Also, a leased employee who is not a common law employee is considered an employee for credit purposes if he or she does all the following:

  • Provides services to you under an agreement between you and a leasing organization,
  • Has performed services for you (or for you and a related person) substantially full time for at least 1 year, and
  • Performs services under your primary direction or control.

But do not use hours, wages, or premiums paid with respect to the initial year of service on which leased employee status is based.

Seasonal Employees

Employees who perform labor or services on a seasonal basis and perform labor or services for you 120 or fewer days during the tax year are not considered employees in determining FTEs and average annual wages. But premiums paid on their behalf are counted in determining the amount of the credit.

Seasonal workers include retail workers employed exclusively during holiday seasons. Seasonal workers also include workers employed exclusively during the summer.

Household and Other Nonbusiness Employees

Household employees and other employees who are not performing services in your trade or business are considered employees if they otherwise qualify as discussed above. A sole proprietor must include both business and nonbusiness employees to determine FTEs, average annual wages, and premiums paid.

Ministers

A minister performing services in the exercise of his or her ministry is treated as self-employed for Social Security and Medicare purposes.

However, for credit purposes, whether a minister is an employee or self-employed is determined under the common law test for determining worker status. Self-employed ministers are not considered employees.

Excluded Employees

The following individuals are not considered employees when you figure this credit. Hours and wages of these employees and premiums paid for them are not counted when you figure your credit.

  • The owner of a sole proprietorship.
  • A partner in a partnership.
  • A shareholder who owns (after applying the section 318 constructive ownership rules) more than 2% of an S corporation.
  • A shareholder who owns (after applying the section 318 constructive ownership rules) more than 5% of the outstanding stock or stock possessing more than 5% of the total combined voting power of all stock of a corporation that is not an S corporation.
  • A person who owns more than 5% of the capital or profits interest in any other business that is not a corporation.
  • Family members or a member of the household who is not a family member but qualifies as a dependent on the individual income tax return of a person listed above. Family members include:
    • A child (or descendant of a child),
    • A sibling or step-sibling,
    • A parent (or ancestor of a parent),
    • A step-parent,
    • A niece or nephew,
    • An aunt or uncle,
    • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
    A spouse is also considered a family member for this purpose.

Eligible Tax Exempt Employers

A tax-exempt small employer is an eligible small employer described in section 501(c) that is exempt from taxation under section 501(a). A tax-exempt employer not described in section 501(c) is generally not eligible to claim this credit. However, a tax-exempt farmers' cooperative subject to tax under section 1381 may be able to claim it as a general business credit.

Hours of Service

Count both the time your employees worked for you and for the time that you paid (and were supposed to pay) them for time off, such as vacation, holidays, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence.

Also, if any of your employees took more than 160 hours of continuous paid time off (as described above) you only need to count the first 160 hours. If your employees have more than 2,080 hours, only count the first 2,080.

Net Premium Payments

In the case of an employer receiving a State tax credit or State subsidy for providing health insurance to its employees, net premium payments are the excess of the employer’s actual premium payments over the State tax credit or State subsidy received by the employer.

In the case of a State payment directly to an insurance company (or another entity licensed under State law to engage in the business of insurance), the employer’s net premium payments are the employer’s actual premium payments.

If a State-administered program (such as Medicaid or another program that makes payments directly to a health care provider or insurance company on behalf of individuals and their families who meet certain eligibility guidelines) makes payments that are not contingent on the maintenance of an employer-provided group health plan, those payments are not taken into account in determining the employer’s net premium payments.

Payroll Tax Limitation for Tax-Exempt Small Employers

If you are an eligible tax-exempt employer, your credit cannot exceed the amount of certain payroll taxes. Payroll taxes, for this purpose, mean only the following:

  • Federal income taxes and Medicare taxes you were required to withhold from employees’ wages during the calendar year.
  • Medicare taxes you were required to pay for the calendar year.

State

The state is where your employee is enrolled in coverage. It is used in determining whether the State Average Premium Limitation applies.

Average Premium Limitation

The amount of your premium payments that are taken into account in calculating the credit is limited to those you would have made under the same arrangement if the average premium for the small group market in the rating area in which your employees enroll for coverage were substituted for the actual premium.

State Subsidies and Tax Credits

Your credit may be reduced if you are entitled to a state tax credit or a state premium subsidy for the cost of health insurance coverage you provide under a qualifying arrangement to individuals considered employees. The state tax credit may be refundable or nonrefundable and the state premium subsidy may be paid to you or directly to your insurance provider.

Although a state tax credit or premium subsidy paid directly to you does not reduce the amount of your employer premiums paid, and although a state premium subsidy paid directly to an insurance provider is treated as an employer premium you paid, the amount of your credit cannot be more than your net premium payments. Net premium payments are employer premiums paid minus the amount of any state tax credits you received or will receive and any state premium subsides paid either to you or directly to your insurance provider for premiums for health insurance coverage you provide under a qualifying arrangement to individuals considered employees.

Total Wages

Wages, for this purpose, mean wages subject to Social Security and Medicare tax withholding determined without considering any wage base limit. If an individual is not considered an employee or is an excluded employee, his or her wages do not count. This includes:

  • Wages paid to any seasonal employees who worked 120 or fewer days during the tax year; and
  • Wages paid with respect to the initial year of service on which leased employee status is based.

Wages or compensation paid to ministers who are common-law employees for duties performed in the exercise of their ministry are not subject to FICA taxes and are not wages as defined in § 3121(a). So the wages of a minister who is a common law employee are not taken into account.

Short Taxable Year If an employer has a short taxable year, wages must be pro-rated (or annualized) in calculating the credit. For example, if a small employer has been in business (and paying premiums) for 6 months during its first taxable year, it must pro-rate the wages earned to reflect the 6 months the employer has been in operation.