What You Need to Know about the Small Business Health Care Tax Credit

How will the credit make a difference for you?

For tax years 2010 through 2013, the maximum credit is 35 percent of premiums paid for small business employers and 25 percent of premiums paid for small tax-exempt employers such as charities.


For tax years beginning in 2014 or later, there will be changes to the credit:

•The maximum credit will increase to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.

•To be eligible for the credit, a small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace.

•The credit will be available to eligible employers for two consecutive taxable years.


Here’s what this means for you. If you pay $50,000 a year toward workers’ health care premiums — and if you qualify for a 15 percent credit, you save… $7,500. If you save $7,500 a year from tax year 2010 through 2013, that’s total savings of $30,000. If, in 2014, you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $10,000 a year.

Even if you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments is more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.

There is good news for small tax-exempt employers too. The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability.

And finally, if you can benefit from the credit this year but forgot to claim it on your tax return, there’s still time to file an amended return.


Can you claim the credit?

Now that you know how the credit can make a difference for your business, let’s determine if you can claim it.

To be eligible, you must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs). Those employees must have average wages of less than $50,000 (as adjusted for inflation beginning in 2014) per year. Remember, you will have to purchase insurance through the SHOP Marketplace to be eligible for the credit for tax years 2014 and beyond.


Let us break it down for you even more.

You are probably wondering: what IS an FTE. Basically, two half-time workers count as one FTE. That means 20 half-time employees are equivalent to 10 FTEs, which makes the number of FTEs 10, not 20.

Now let’s talk about average annual wages. Say you pay total wages of $200,000 and have 10 FTEs. To figure average annual wages you divide $200,000 by 10 — the number of FTEs — and the result is your average annual wage. The average annual wage would be $20,000.

Also, the amount of the credit you receive works on a sliding scale. The smaller the business or charity, the bigger the credit. So if you have more than 10 FTEs or if the average wage is more than $25,000 (as adjusted for inflation beginning in 2014), the amount of the credit you receive will be less.


How do you claim the credit?

You must use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. For detailed information on filling out this form, see the Instructions for Form 8941.

If you are a small business, include the amount as part of the general business credit on your income tax return.

If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don’t ordinarily do so.


Don’t forget… if you are a small business employer, you may be able to carry the credit back or forward. And if you are a tax-exempt employer, you may be eligible for a refundable credit.

Upcoming Affordable Care Act (ACA) Taxes

1.            How are the ACA taxes factored into the medical rate?

Blue Shield calculated the cost of ACA taxes and included the amount in the medical rate.  The medical rate that customers will see on bills starting with January 2014 invoices includes the portion for the ACA taxes at the subscriber and dependent level.

2.            I purchased plans in 2013. Are the ACA taxes now included in my rate?

Yes. The new ACA taxes will be included in the medical rate for small business customers starting with January 2014 invoices.

3.            With the ACA taxes included in medical rates, how do I calculate payroll deductions?

The taxes taking effect on January 1, 2014, represent a 3.6% change of the medical rate.  Blue Shield does not offer tax advice, and we encourage you to speak with your tax or financial advisor for guidance.

Type of tax
Takes effect
Approximate cost
Health insurer tax 01/01/14 2.3% of dues and/or premiums
Transitional reinsurance tax 01/01/14 1.3 % of dues and/or premiums
Exchange tax upon renewal, 2014 0.2% of dues and/or premiums
Risk adjustment tax upon renewal, 2014 0.02% of dues and/or premiums


Reference: Blue Shield of California

Are there any other taxes or fees for PPACA?

New taxes under the PPACA for 2014 include a fee on insurers providing health insurance for any U.S. health risk. This fee is apportioned according to their market share of premiums written for the prior year. This fee will be assessed to policyholders. Excluded coverages include insurances for long term care, disability, accidents, specified illnesses, hospital or other fixed indemnity, medical benefits that are secondary or incidental to other benefits, and Medicare supplemental.


Health benefits coverages to report on employee W-2 forms.

Employee benefits coverages that must be reported on the W-2 include all health coverages such as:

  • Medical, Dental, and Vision coverages
  • Prescription drug coverage
  • Executive physical benefits
  • On-site clinics
  • EAPs that provide medical care
  • Wellness programs that provide medical care