This is the second posting in our series on the small business health care tax credit.
Part 2 - How Does the New Health Care Tax Credit Impact You?
In our posting last week, How Does the New Health Care Tax Credit Impact You, we went over the basic requirements the Internal Revenue Service (IRS) has outlined for this credit under the Affordable Care Act. Since that posting, the IRS has issued new guidance for small businesses and small tax-exempt employers relating to this tax break. IRS Notice 2010-44 gives real life examples so businesses can calculate the number of full-time equivalent (FTE) employees they have plus figure out how much of a Federal health insurance tax credit they can claim.
Steps for Determining Your Health Care Tax Credit Eligibility
IRS Notice 2010-44 is a 20-page document with a ton of information. So we've gone through this document, deciphered the ‘government speak' and pulled out what we think are the most relevant examples for small businesses. Here are the steps an employer must follow to determine if their business is eligible for this tax break...
- Determine the employees who are taken into account for the purpose of this tax credit.
- Determine the number of hours of service performed by those employees.
- Calculate the number of full-time equivalent (FTE) employees.
- Determine the average annual wages paid per FTE.
- Determine the premiums paid by the employer that are taken into account for the purpose of this tax credit.
We'll go through each of these steps in detail. This will take more than one posting though. So be on the lookout for future blog articles in the coming weeks.
Step 1: Who Counts as an Employee?
The first step in determining if your small business or tax-exempt organization is eligible for this health care tax credit is to determine the number of employees you can count. In general, employees who perform services for a business during a tax year count when determining an employer's FTEs, average wages and premiums paid.
Seasonal workers only count when determining FTEs and average annual wages if they work for an employer more than 120 days during the tax year.
Certain individuals are excluded though and don't count as an employee for the purpose of this health care tax credit. So the wages, hours and premiums paid on behalf of these individuals will not count when determining the amount of this tax break.
So Who Doesn't Count?
According to the IRS guidelines, the following individuals do not count towards your calculation of FTEs for the health care tax credit...
- Sole proprietors
- Partners in a partnership
- Shareholders owning more that 2 percent of an S corporation
- Owners with more than 5 percent of other businesses
- Family members of these owners and partners
The IRS's definition of a family member for the purpose of this tax credit is all encompassing. It includes everyone from an owner's or partner's niece or nephew, brother-in-law or sister-in-law... and even their mother-in-law. For a complete list of who else the IRS defines as a family member, see page 3 of the IRS Notice 2010-44.
Our next blog article on the small business health care tax credit will focus on steps 2 and 3... determining the number of hours of service worked by employees and calculating the number of FTEs for your business.