Making Health Reform a Reality for You: Small Business Tax Credits

One of the most important benefits in the new law is relief for small businesses from the high cost of providing care. Small businesses are saddled with especially high costs when it comes to providing care for their employees. On average, their premiums are 18 percent higher than large businesses for the same coverage.

The new health insurance reform law helps make coverage more affordable for small businesses so they can provide health care for their workers. Effective immediately, millions of small businesses are eligible to receive a tax credit to cover up to 35 percent of premiums. In 2014, the credit will increase to 50 percent, saving businesses $40 billion by 2019.

This tax credit will be overseen by the Department of Treasury.

Here are a few important things you need to know about these tax credits:

• Available Immediately. The tax credit is effective January 1, 2010. As a result, small businesses that provide health care for their workers will receive immediate help with their premium costs, and additional firms that initiate coverage this year will get a tax cut as well.
• Broad Eligibility. The Council of Economic Advisors estimates that 4 million small businesses are eligible for the credit if they provide health care to their workers. Qualifying firms must have less than the equivalent of 25 full-time workers (e.g., a firm with fewer than 50 half-time workers would be eligible), pay average annual wages below $50,000, and cover at least 50 percent of the cost of health care coverage for their workers.
• Substantial Benefit. The credit is worth up to 35 percent of a small business’s premium costs in 2010. On January 1, 2014, this rate increases to 50 percent.
• Non-Profits Eligible. Tax-exempt organizations are eligible for a 25 percent tax credit in 2010. In 2014, this rate increases to 35 percent. (The credit rates are lower for non-profits to ensure that the value of the credit is approximately equal to that provided to for-profit firms that cannot claim a tax deduction for the amount of the credit claimed.)
• Gradual Phase-Outs. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.
• Premium Cost Eligibility. To avoid an incentive to choose a high-cost plan, an employer’s eligible contribution is limited to the average cost of health insurance in that state. 

To learn more about the small business tax credit, you can also visit IRS.gov.