Small Business Health Care Tax Credit
Millions of small businesses will receive postcards from the IRS beginning the week of April 19 that alert them to the new Small Business Health Care Tax Credit and encourage them to check their eligibility. Even if you don’t receive a postcard, your business still may be eligible.
Included in the Patient Protection and Affordable Care Act approved by Congress last month and signed into law by President Obama, the credit is one of the first health care reform provisions to go into effect. The credit, which takes effect this year, is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
“We want to make sure small employers across the nation realize that — effective this tax year — they may be eligible for a valuable new tax credit. 
Our postcard mailing — which is targeted at small employers — is intended to get the attention of small employers and encourage them to find out more,” IRS Commissioner Doug Shulman said. “We urge every small employer to take advantage of this credit if they qualify.”
In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees in 2010. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low- and moderate-income workers.
Eligibility Rules
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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.
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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).
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Average annual wage. A qualifying employer must pay average annual wages below $50,000.
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Both taxable (for profit) and tax-exempt firms qualify.
Amount of Credit
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Maximum Amount. The credit is worth up to 35 percent of a small business’ premium costs in 2010. On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers).
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Phase-out. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.
Three Simple Steps for Employers to Qualify
To determine if your small business or tax exempt organization qualifies for the Small Business Health Care Tax Credit, follow the three simple steps on our fact sheet.
Washington Reforms Health Care And Taxes
Sunday’s night’s health care bill will go down as one of those once-in-a-generation accomplishments. I’m not here to debate the merits of the bill – historians will still be doing that decades from now. But it’s important to point out some important tax changes included in the bill and the companion “reconciliation” bill now before the Senate. (Just how important are they? Well, the Congressional Budget Office says the IRS will need $10 billion and 17,000 new employees to enforce its share of the new rules!)
Here are some of the key tax provisions:
- Starting immediately, certain small businesses with less than 10 employees will get a 35% credit for the cost of providing employee health benefits.
- Starting in 2011, employers will have to report the value of health benefits on Form W2.
- The penalty tax for Health Savings Account distributions not used for health care expenses doubles from 10% to 20%. This will discourage using HSAs for supplemental retirement savings.
- Starting in 2013, the 7.5% floor for deducting medical and dental expenses climbs to 10% (unless you or your spouse are 65 or older, in which case it remains at 7.5% until 2016).
- Healthcare flexible spending account contributions are capped at $2,500 per year.
- Starting in 2014, businesses with more than 50 employees will have to offer heath benefits or pay a penalty of $750/employee.
The reconciliation bill includes one more unwelcome surprise. Currently, the Medicare tax is limited to 2.9% of earned income. The reconciliation bill imposes an additional Medicare tax of 0.9% on earned income above $200,000 (individuals) or $250,000 (families). It also adds a 3.8% “Unearned Income Medicare Contribution” on investment income – specifically, interest, dividends, annuities, royalties, capital gains, and rents – for taxpayers with Adjusted Gross Income above those same thresholds. Those new levies would take effect in 2013.
The complete bill is 1,018 pages, so it’s going to take some time to analyze. But we’ll be paying close attention as details become available. In the meantime, call us with any questions!
Hiring Incentives to Restore Employment Act (HIRE)
President Obama signed into law the Hiring Incentives to Restore Employment Act (HIRE), an economic stimulus plan that contains $15 billion dollars in new incentives for businesses, which hire unemployed workers in 2010.
Two key provisions that may affect you:
- Eliminating the current 6.2 percent employer Social Security tax for eligible new hires
- A $1,000 business tax credit for keeping eligible employees for at least 52 consecutive weeks
This legislation 
makes significant changes that go beyond payroll processing – your business may be affected in numerous ways. To help determine the impact of this new legislation, call our office to receive a free consultation.
In addition, The HIRE Act is another reminder why so many clients prefer to have their CPA’s or accountants prepare their payroll. With over 25 years of experience in helping small business such as yours, we provide solutions that go beyond payroll processing. Emil Estafanous, CPA has processes in place to monitor and react to the changing legislative landscape and support the ongoing needs of your business.
It would be to your advantage to contact me and schedule an appointment so we can review how you can benefit from this new law.
