The new federal health care law contains a new tax credit for small businesses that offer health insurance to their employees.  The credit targets smaller-size businesses that employ low to moderate income workers.

In general, eligible small businesses can claim the credit when they file their annual income tax return for 2010.  The credit is limited to small businesses with up to 25 full-time equivalent workers, with average annual wages of less than $50,000, and who pay an amount equal to at least 50% of the cost of employee-only coverage .  In general, the wages, hours and premiums for business owners and their families are not counted.  For the next four years (2010-2013), up to 35% of the amount the business pays for health insurance may be claimed. In 2014, a tax credit of up to 50% for coverage purchased through an Exchange will be available for 2 years.

Businesses with 10 or fewer full-time equivalent workers, with average annual wages of less than $25,000, and whose health insurance costs are not more than the average cost of coverage in NYS will be eligible for the full 35% credit.  The credit decreases as the size of the business increases, and businesses with more than 25 full-time equivalent workers cannot receive the credit.  However, businesses with more than 25 employees may be eligible for the credit if some of the employees only work part-time.

Eligible businesses with tax liability less than the amount of the credit will not receive a refund, but may be able to carry the remainder of the credit forward for use in future years. 

A credit is also available for tax-exempt businesses, although the rules differ and the credit is smaller (up to 25%).  In general, for nonprofits, the credit is a refundable credit.  And starting in 2014, a credit of up to 35% will be available for 2 years for coverage purchased by nonprofits through an Exchange.

As this is a new law, the federal government may issue more guidance and details on how the credit will work, so be sure and check back on NYC Health Insurance Link and the IRS website for the most current information.

Want to know more? 

• Get more details at the IRS website
• Quickly see if your business may qualify using IRS's simple3-stepcheck
• Find out more about who is considered an employee, how your contribution is calculated and more on the IRS's questions and answers page
• See examples of how the credit works for different businesses

Sources:  Patient Protection and Affordable Care Act and IRS website  and linked webpages, accessed on April 1, 2010.

Please Note:   The information contained on this website is for informational purposes only. Potential tax savings will depend on individual circumstances. Interested parties should consult their tax advisor. Further, to ensure compliance with requirements imposed by U.S. Treasury Regulations, we inform you that any U.S tax advice deemed to be contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Last updated:  April 16, 2010