The tax law provides a credit for small business employers in 2010, 2011, 2012, and 2013 that pay the health insurance premiums for their low- to moderate-income workers. This refundable credit can be as much as 35% of the insurance premiums paid by the employer.

To qualify for the credit, the employer can’t have more than 25 full-time equivalent employees, and the average wage of the employees cannot exceed $50,000 for the year. The 25 full-time equivalent employee limit is computed by taking into account both full-time and part-time employees for the year using a formula.

To see if your firm may qualify for the credit, complete the two worksheets below – the results at lines 6 and 9 will tell you if your firm is under the maximum full-time equivalent employee and average wage limitations.

Determine the Number of Full-Time Equivalent Employees:

  1. Enter the number of employees who worked 2,080 hours or more during the year _____
  2. Multiply line 1 by 2,080 _____
  3. Enter the total hours worked by all employees who worked less than 2,080 hours during the year _____
  4. Enter the total of lines 2 and 3 _____
  5. Divide the result on line 4 by 2,080  _____
  6. Number of full-time equivalent employees (round line 5 down to the next whole number,
    unless the number is less than one, in which case enter 1. ____

If line 6 is greater than 25, stop – your firm does not qualify for this credit.

Determine the Average Annual Wage:

7. Enter the total of all wages paid to employees during the tax year _____
8. Divide line 7 by the number of full-time equivalent employees (line 6) _____
9. Average annual wage (round amount from line 8 down to the next whole $1,000) _____

If the amount on line 9 is $50,000 or less, you may qualify for the credit. Besides meeting the limits of lines 6 and 9, to qualify for the credit an employer has to contribute at least 50% of the premiums for the employees’ health insurance coverage on a uniform basis. However, for tax years beginning in 2010 only, an employer can meet this requirement even if it pays differing percentages of different employees’ premiums as long as all employer payments are at least 50% of each employee’s premium based on single (employee-only) coverage.

The amount of the credit gradually phases out if the number of full-time equivalent employees exceeds ten or if the average annual wage of the employees exceeds $25,000. Under the phase-out, the full amount of the credit is available only to an employer with ten or fewer full-time equivalent employees and whose employees have average annual wages of less than $25,000.

Please give this office a call if you have questions related to this credit or determining whether your firm can benefit from claiming the credit.

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