How the Small Business Health Care Tax Credit Works

The government encourages small businesses to provide health insurance through a tax credit.
The government encourages small businesses to provide health insurance through a tax credit.

One of the many aims of the Affordable Care Act of 2010 was to make health coverage more accessible to a wide range of people. Employees of small businesses are often uninsured or underinsured because their employers, for financial or other reasons, don't provide health coverage. So a small business health care tax credit program was created as part of the ACA to encourage more small-business owners to buy health insurance for their workers.

To be eligible for the tax credit, a business can have the equivalent of no more than 25 full-time employees. ("Equivalent" means that part-time employees count as a fraction of a full-time employee. A business could have up to 50 half-time employees and still qualify for the program.) The average yearly salary of the full-time employees must be no more than $50,000, and the employer must be responsible for at least half of its employees' health premiums. The credit works on a sliding scale and is designed to help smaller businesses by providing them with bigger credits.

The small business health care tax credit is refundable, meaning that an employer can collect a refund if the credit exceeds the business's tax obligation. For the tax years 2010 through 2013, an employer could take a maximum credit of 35 percent through the program. Small tax-exempt businesses could receive at most a 25 percent credit. In 2014, these percentages increased to 50 percent and 35 percent, respectively. Employers can claim a business expense deduction for any premiums they pay in excess of the credit, allowing them to take advantage of both deductions and credits on health care expenses for their employees. Starting in 2014, the credit is available only for two consecutive years -- but employers do have the option of amending their tax returns to claim the credit. This option is good for three years after a return was filed, or two years after a payment was made for that year.

Another change for 2014 is that the employer's health plan must be offered through the Small Business Health Options Program (SHOP) marketplace, which was established through the Affordable Care Act. For more information on how SHOP works, keep on going to the next page.