If you offer your employees health coverage through the Affordable Care Act, you might have health care tax credit eligibility. You could also be eligible for write-offs if you’re a business owner who bought insurance through the ACA’s program. You can save money on your tax return by claiming a health insurance tax credit.
Under the Affordable Care Act (ACA), large employers must provide health insurance to full-time employees. If you have fewer than 50 employees, you are considered a small employer. Though small employers do not have to offer coverage, those who want to provide employee health insurance can do so through the Small Business Health Options Program (SHOP).
The SHOP Marketplace is an affordable option for small employers with 50 or fewer full-time equivalent employees. If you are self-employed, you can also get individual coverage through the SHOP Marketplace.
Health insurance tax credit for small employers
The small business tax credit is designed to encourage small business owners to offer their employees group health insurance. Small employers can provide their employees with health coverage while cutting down expenses.
Though you can get a fairly large tax break, many small employers do not take advantage of the credit. In fact, only about 181,000 small employers claimed the credit in 2014. But, there were 1.4 to 4 million qualified small employers that same year. Don’t miss your opportunity to claim extra money on your small business tax return this year.
Small employer tax credit requirements
Your small business must meet the following requirements to qualify for the health insurance tax credit:
- You have fewer than 25 full-time equivalent (FTE) employees.
- You pay average annual wages below $52,000 (this number is subject to change with inflation. If you are claiming the credit for 2014, you must have had average annual wages of $50,000).
- You contribute 50% or more toward your employees’ insurance premiums.
- You bought coverage through the Affordable Care Act’s Small Business Health Options Program (SHOP) Marketplace.
Full-time equivalent (FTE) employees
You need to have fewer than 25 full-time equivalent employees to qualify for the health insurance tax credit. The ACA defines a full-time employee as someone who works at least 30 hours and 120 days per year. An FTE is a combination of your part-time employees that meet the requirements of a full-time employee.
To determine your number of FTEs, add the hours of all your part-time employees. Then, divide the total part-time hours worked by 30 hours. If the result is a decimal, round down. Add that number to the number of full-time workers you employ.
For example, you have 2 full-time employees. You also have several part-time employees whose annual hours add up to 450 hours.Divide part-time hours by 30 hours: 450 / 30 = 15
Add the result to full-time employees for your FTEs: 2 + 15 = 17 FTEs
The final figure is your number of full-time equivalent employees. If you have fewer than 25 FTEs, you meet the requirement. And, you must make premium payments under a qualifying arrangement. That means for each employee enrolled, you match their percentage paid toward premium expenses.
How does the health care tax credit work?
Small business owners can qualify for a tax credit of up to 50% of their employee premium contributions. For example, if you paid $15,000 for employee health insurance in 2016, you could get up to a $7,500 tax credit.
The credit works on a sliding scale. The smaller the employer, the higher the credit. The maximum credit (50% of premium contributions) is available to employers with 10 or fewer FTEs and average annual wages of less than $25,000.
What if I’m a tax-exempt organization?
If you are a tax-exempt organization with employees, you can claim the health care tax credit. You have the same requirements listed for nontax-exempt businesses:
- You have fewer than 25 full-time equivalent (FTE) employees.
- You pay average annual wages below $52,000.
- You contribute 50% or more toward employees’ insurance premiums.
- You bought coverage through the SHOP Marketplace.
As a nonprofit, you qualify for a tax credit up to 35% of your employee premium contributions. The credit works on a sliding scale. The fewer employees you have, the bigger credit you receive.
Claiming the tax credit
To claim the health care tax credit for small employers, attach Form 8941, Credit for Small Employer Health Insurance Premiums, to your tax return. Form 8941 helps you calculate the amount of your tax credit.
The health care tax credit is available for two consecutive tax years. If the credit is more than your taxes owed, you can carry the unused amount back or forward to other tax years. If you’re a nonprofit, the credit is refundable, meaning you can get cash for unused credit.
What if I am self-employed and bought insurance through the SHOP Marketplace?
If you are self-employed and bought health coverage through the SHOP Marketplace, you could be eligible for tax write-offs.
You are self-employed if you are a sole proprietor, member of a partnership, independent contractor, or freelancer with no employees.
There are several types of tax write-offs for the self-employed:
- The Self-employed Health Insurance Tax Deduction
- Itemized medical and dental expenses deductions
- Premium tax credits
You can only claim one of the deductions when filing your tax return.
The Self-employed Health Insurance Tax Deduction
Health insurance premiums for you and your dependents are fully deductible if you are self-employed and bought coverage through the SHOP Marketplace.
With the Self-employed Health Insurance Tax Deduction, you can lower your adjusted gross income by the amount you pay in premiums on health insurance, dental insurance, and qualified long-term care for yourself, your spouse, and dependents.
The deduction is found on Line 29 of your individual tax return, Form 1040. Conditions of the deduction vary based on the source of your income and how you file taxes. You can review IRS Publication 535 for a full list of restrictions.
You cannot deduct premiums if you are eligible for group insurance from your employer or your spouse’s. Let’s say you own a business. If you also work a full-time job and were offered a group insurance plan, you cannot claim the deduction.
Itemized medical and dental expenses deductions
As a self-employed person, you can list unreimbursed medical expenses as itemized deductions on your individual tax return. Use Schedule A to list expenses and attach it to Form 1040. By itemizing medical and dental expenses, you can only deduct up to 10% of your adjusted gross income.
What is a premium tax credit?
Premium tax credits are based on income. The credits are available to self-employed individuals who make 100% to 400% of the Federal Poverty Level. For 2016, these figures are between $11,770 and $47,080 for an individual and between $24,250 and $97,000 for a family of four.
You can use the premium tax credit to lower your adjusted gross income on your tax return. The credit is based on a sliding scale. The lower your income, the higher the credit.
Advanced premium tax credit
You can also use the premium tax credit to pay your insurer in advance, lowering your monthly premium. This is called an advanced premium tax credit.
Advanced premium credits work like this:
When you enroll in a Marketplace plan, you can choose to have the Marketplace calculate an estimated credit. The Marketplace pays your insurance company the credit, which lowers your monthly premiums. You reconcile the advance paid with the actual credit calculated when you file taxes.
Sometimes, your advance credit payment is more than the actual allowable credit on your return. The difference is subtracted from your refund or added to your balance due.
Regardless of if you use the premium or advanced premium credit, calculate the amount using Form 8962, Premium Tax Credit. You will need Form 1095-A or Form 1095-B to fill out Form 8962. These forms provide information about your premium payments.
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