Insurance Tax Credit

If your business pays health insurance premiums, you may be eligible to claim a new credit on your 2010 tax return.  Employers with

·         fewer than 25 employees (more if the company has part time employees) and

·         less than $50,000 per person in average wages may be eligible. 

 

The credit can be worth up to 35% of the health insurance premiums you pay as an employer.

 

Here’s an example of how the credit works:

 

Main Street Mechanics has 10 employees with total wages of $250,000.  That works out to $25,000 per worker in average salary.  The company pays $70,000 towards employee health insurance premiums.  In 2010, Main Street will get a tax credit of $24,500, or 35% of the total premiums paid. 

 

While employers with up to 25 employees are covered, the benefit phases out once you get more than 10 employees.  Here’s an example of the impact of the phase out on a larger employer.

 

Downtown Diner employs 40 part time workers, and pays more than half of their health insurance premiums.  Each worker puts in a 20-hour week, so that’s the equivalent of 20 full time employees.  The company payroll has wages of $500,000 total, or $25,000 per full time equivalent worker.  The company pays $240,000 in health insurance premiums.  Their 2010 tax credit for that is $28,800. 

 

So how do you find out if your company is eligible for this credit?

 

Needless to say, as with all things involving income taxes, there is a list of factors to be reviewed, and calculations to follow.   To get you started, these questions will be what your Nicksich & Neel tax advisor is going to ask for around tax time.

 

1.      Determine the employees who are taken into account for purposes of the credit.

-  This isn’t as easy you might think.  Business owners and their families are not included in the list of eligible employees.  On the other hand, employees that do not participate in your company’s health insurance plan still have to be counted. 

2.      Determine the number of hours of service performed by these employees.

-  This includes not only time actually on the job, but any comp time, or vacation time.

3.      Calculate the number of full time equivalent workers based on both full and part time employees.

4.      Determine the average annual wages per full time equivalent employee. 

-  That’s fairly straightforward, though there is a cap on how many hours can be attributed to one employee’s work. Also, as average annual wages per worker exceed $25,000 the amount of the credit is gradually reduced.   

5.      Determine the premiums paid by the employer that qualify for the credit. 

-  In general, the employer should cover at least half the cost of the employees’ coverage in order to qualify for the credit.    

 

The IRS has released form 8941 , which is what you have to fill out to get the credit.  If you are a not for profit entity, you will caclulate your credit on form 8941, and then carry it over to form 990T.  In addition, the IRS has an FAQ page on the credit.  If you don't want to read up on this via the IRS website or just have specific questions about your company, feel free to call and schedule an appointment.  Or you can e-mail your questions to info@thecpa.us. 

The materials related to taxes on www.thecpa.us are informational only and are not meant as tax advice.  Consult with your tax advisor to determine how any item applies specifically to your situation.  We are happy to answer any questions you may have regarding this information.  Please contact us for an appointment at info@thecpa.us