In 2012, Small Businesses accounted for the employment of 52% of people [1] in the United States. This means that small businesses drive a lot of the American economy. Because small businesses often have fewer resources than large corporations, there are lots of tax breaks [2] and other help through associations such as the Small Business Association to offer assistance.
Still, a small business is a business in the eyes of the government and therefore is still responsible for taxes and certain minimum requirements when employing people. Let’s take a look at the new healthcare act [3], employer mandates [4], and how small businesses fit into it.
Employer Mandates in Obamacare
The Patient Protection and Affordable Care Act of 2010 (aka Obamacare) requires that large employers (with 50 full time employees or more) either offer a group healthcare insurance plan, or pay a penalty for not doing so [4]. There are also requirements for any group healthcare insurance plan—minimum essential coverage—in order for the plan to count in the federal government’s eyes. These include insurance plan premiums costing no more than 9.5% of the employee’s income, as well as providing the minimum value of 60% of costs within the plan.
The penalty can be steep, especially with a lot of employees. The two types of penalties that can be assessed is either a strong penalty or a weak one. The strong penalty is assessed on large employers who do not offer any group health insurance plan at all. The weak penalty is assessed on large employers who offer a group health insurance plan that does not satisfy the minimum essential coverage requirements. Penalties can be up to $3,000 per employee.
I keep referencing large employers in this article; this is because if a business is deemed to be a small business by this Act, then they get a pass. On top of this, they may even receive health care tax credits.
What Defines a Small Business?
The Small Business Administration (SBA), was founded in 1953 [5] with the goals to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.” The association helps small businesses through its four primary functions: Access to Capital (Business Financing), Entrepreneurial Development (Education, Information, Technical Assistance and Training), Government Contracting (Federal Procurement), and Advocacy (Voice for Small Business). According to the SBA, a small business has no more than 500 employees for most manufacturing and mining industries, and no more than $7 million in average annual receipts for most nonmanufacturing industries.
However, there are varying definitions of a small business according with the legislation and context discussed (as you will see below). For example, just within this healthcare act there are two different definitions of small business. We’ve discussed the definition for seeing if you are required to adhere to the employer-sponsored healthcare plan mandate. Now let’s take a look at the second definition to see if you can reap a tax credit in the meantime.
Small Business Healthcare Tax Credits
Within the Patient Protection and Affordable Care Act of 2010 (aka Obamacare), there are incentives for offering employer-sponsored health care mandates. The smaller the business, the more the tax incentives. If you did not earn any income in a particular year, you can carry the small business health insurance tax credit back or forward in order to take advantage of it. Also, the credit is refundable [6] (good for tax-exempt businesses), meaning 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.
However, the Act is much less lenient in its definition of what a small business actually is. According to Obamacare, a small business as a business that has less than 25 full-time equivalent employees making an average of about $50,000 a year or less. In order to qualify, you also must pay at least 50% of your full-time employees’ premium costs (you do not need to offer healthcare insurance coverage to part-time or to dependents [7]).
Maximum Health Insurance Tax Credit
So how much can you get? For tax years 2010 through 2013 [8], the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities. This is increased starting January 1, 2014, when the tax credit is worth up to 50% of your contribution toward employees’ premium costs (up to 35% for tax-exempt employers).
How to Claim the Small Business Health Care Tax Credit
If you think that your small business qualifies for the health care tax credit, then you need to fill out IRS Form 8941: Credit for Small Employer Health Insurance Premiums [9]. If you are a tax-exempt organization, then you will need to fill out IRS form 990-T: Exempt Organization Business Income Tax Return [10].