Earn.com Blog

The Patient Protection and Affordable Care Act passed by Congress and signed by President Obama on March 23, 2 010, gives a tax credit to certain small employers and tax exempt organizations that provide health care coverage to their employees, for tax years beginning in 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 general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. 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.

Eligibility Rules

• Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.
• Firm size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
• Average annual wage. A qualifying employer’s wages must be less than $50,000 per employee per year.
• Both taxable (for profit) and tax-exempt firms qualify.

Amount of Credit

• Maximum Amount. The credit is worth up to 35 percent of a small business’ premium costs in 2010. On January 1, 2014, this rate increases to 50 percent or 35 percent for tax-exempt employers. The maximum credit goes to smaller employers, those with the equivalent of 10 or fewer full-time workers, paying less than $25,000 per employee per year.
• Phase-out. The credit phases out gradually for firms with average IRS wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

The IRS will use postcards to reach out to millions of small businesses that may qualify for the credit. The postcards will encourage small business owners to take advantage of the credit if they qualify. More information about the credit, including tax tips, guides and answers to frequently asked questions, is available on IRS.gov (keyword: Health Care Tax Credit) and at http://www.healthreform.gov.

IRS.gov Newsletter

Tags: business taxes, tax, tax credit, tax preparation, taxes