The new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010. Over the next several weeks, Vision Payroll will be providing further information on the Small Business Health Care Tax Credit. Today’s topic is the Maximum Credit for Tax-Exempt Qualified Employers.
For taxable years beginning in 2010 through 2013, the maximum credit is 25% of the Expenses Counted in Calculating the Health Care Credit. There is a further limitation equal to the amount of certain taxes that the qualified tax-exempt employer must pay with Form 941. The taxes are the sum of the federal income and Medicare taxes withheld and the employer portion of the Medicare tax.
If a qualified tax-exempt employer has eight employees who earn an average of $24,500 per year and the employer pays $90,000 in qualifying health care premiums, the maximum credit would be $90,000 X 25% = $22,500. This assumes that the qualifying health care premiums do not exceed the average premium for a small group market plan for the state or area of the state where the employer offers coverage. If the total federal income and Medicare taxes withheld and the employer portion of the Medicare tax, are greater than $22,500, the credit is $22,500. But if the federal income and Medicare taxes withheld and the employer portion of the Medicare tax are only $20,000, the credit must be limited to $20,000.
The next topic to be covered in this series is the Impact of More than Ten Full-time Equivalent Employees. Contact Vision Payroll if you have further questions on the Maximum Credit for Tax-Exempt Qualified Employers.
The health care tax credit will provide some initial relief to small businesses, especially in California where small businesses are overtaxed as it is. But with annual increases of 20% in health insurance rates even a 35% tax credit does little to help.