Affordable Care Act

The Basic Facts

Small Business – Health Care Tax Credit

Small businesses with fewer than 25 FTEs and with average wages less than $50,000 may be eligible for a credit of up to 50% of the employer’s payment for two consecutive years, beginning in 2014. From 2010 through 2013, there is a transitional credit of 35% as well. The employer must pay at least 50% of the health plan premium to be eligible for the tax credit. The tax credit is applied against the income tax, so small employers without tax liability will receive no current benefit and small employers with inadequate tax liability will not receive the full current benefit. Credits can be carried backward one year (except in the first year offered) and forward 20 years.

Tax-exempt entities, such as charities, are eligible for a 35% credit (25% during the transition) taken against payroll taxes.

The credit is phased out both by size and average income in an additive fashion. The credit is reduced by the number of FTE employees over 10, divided by 15; the credit is also reduced by average wage over $25,000 divided by $25,000.

For example, a business with 10 or fewer FTEs employees and $25,000 or less in average wages will receive a credit of 50% of the employer contributions to health premiums in 2014. Changes to the size of the firm or its payroll could affect this firm’s maximum tax credit in one of three ways:

  1. If the average wage remains at $25,000 or less but FTEs size rises to 15, the credit is reduced by 33% (15 minus 10, all divided by 15, or approximately one-third or 33%).
  2. If average wages rise to $30,000 but size mains at 10 or fewer FTEs, the credit is reduced by 20% ($30,000 minus $25,000, all divided by $25,000) for a credit of 40% (instead of the maximum of 50%).
  3. If both phaseouts are added, so that a firm with 15 employees and an average wage of $30,000, both the 33% and the 20% apply for a reduction of 53%. This combined phaseout would reduce the 50% maximum credit to 23% of employer contributions to health care premiums.