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What Small Businesses Need to Know About Health Care Tax Credit

Starting this year, the credit goes up to 50 percent for for-profit entities, and 35 percent for tax-exempt ones.


The 2014 tax year brings with it not only the healthcare requirements for individuals, which is being mandated through the IRS and the nation's income tax system, but also changes to an important credit for small businesses.

From 2010 through 2013, the Small Business Health Care Tax Credit offered a credit of up to 35 percent of the insurance premiums that small employers pay on behalf of their employees (up to 25 percent for small tax-exempt employers). Starting this year, that goes up to 50 percent for for-profit entities, and 35 percent for tax-exempt ones.

The credit was created to help offset some of the costs of health insurance, thereby promoting more employee coverage by small employers. Small businesses or their tax professional should use Form 8941 to figure their credit.

To qualify, the employer must have fewer than 25 full-time equivalent employees with an average wage of less than $50,000 per year, and the employer is paying at least half of their employees' health insurance premiums. The insurance mush be from a qualified health plan offered through a Small Business Health Options Program marketplace.

If there is no such marketplace available in a small business' region, they can seek insurance through another provider, with some exceptions.

The credit is also available if a business had no tax due, in which case they can carry the credit forward or back to other tax years. The remaining costs of the health insurance premiums can be claimed as a deductible business expense.

For tax-exempt employers, the credit is refundable if it does not exceed their income tax withholding and Medicare tax liabilities.