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 Impact of Average Annual Wages Greater than $25,000.

Employers with average annual wages of $25,000 or less do not need to reduce their credit due to the average annual wage. For employers with average annual wages greater than $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the amount by which the average annual wages exceed $25,000 and the denominator of which is $25,000. If an employer has 10 employees with average annual wages of $33,000 and a credit before reduction of $50,000, then the credit reduction would be $16,000. The steps are as follows:

1. Calculate excess average annual wages $33,000 – $25,000 = $8,000.
2. Calculate fraction $8,000 ÷ $25,000 = 32%.
3. Multiply fraction by credit amount before reduction $50,000 X 32% = $16,000.

The allowable credit would be $50,000 – $16,000 = $34,000.

The next topic to be covered in this series is the Impact of More than Ten Full-time Equivalent Employees and Average Annual Wages Greater than $25,000. Contact Vision Payroll if you have further questions on the Impact of Average Annual Wages Greater than $25,000.