Is Your Small Business Eligible for Health Insurance Tax Credits? Here’s What You Need to Know

As a small business owner, you’re likely aware that providing health insurance to your employees can be both a critical investment and a significant expense. Not only does offering health insurance help attract and retain top talent, but it also supports the health and well-being of your team—leading to improved productivity and job satisfaction. However, the high cost of health insurance premiums can be a major hurdle for many small businesses, especially those with limited resources.

This is where Health Insurance Tax Credits come in. If your business is eligible, these credits can reduce the amount you pay for health insurance premiums, making it more affordable for you to provide coverage to your employees. The Health Insurance Tax Credit is a valuable financial incentive designed specifically to help small businesses offer health insurance and meet the needs of their workforce without breaking the bank.

Understanding whether your small business qualifies for these tax credits is crucial. The eligibility criteria can be a bit complex, and not every business will qualify. However, for those that do, these credits can significantly lower the financial burden of offering health coverage, allowing you to offer better benefits to your employees while also reducing your overall healthcare costs.

In this blog, we’ll break down what Health Insurance Tax Credits are, how they work, and how you can determine if your small business is eligible. Whether you’re a seasoned entrepreneur or a new small business owner, understanding this opportunity can help you make more informed decisions when it comes to offering health insurance to your team. Let’s explore the ins and outs of this potential benefit and how it could work for your business.

What Are Health Insurance Tax Credits?

Health Insurance Tax Credits are government-provided incentives designed to make health insurance more affordable for small businesses. Specifically, these credits help offset the costs of providing health coverage to employees, reducing the financial strain on employers. In essence, these tax credits can significantly lower the premium costs that small businesses must pay when offering health insurance.

For small businesses, providing health insurance can be a challenge due to the rising costs of premiums. However, the federal government offers tax credits to help ease this burden, encouraging more small businesses to offer health coverage to their employees. By understanding how these tax credits work, business owners can take advantage of potential savings that can make it easier to provide competitive benefits while managing costs.

There are two primary types of health insurance tax credits available to small businesses:

1. Small Business Health Care Tax Credit (via the Affordable Care Act)

This credit is designed specifically for small businesses with fewer than 25 full-time equivalent (FTE) employees. It helps businesses offset the cost of providing health insurance through the Small Business Health Options Program (SHOP) Marketplace.
The Small Business Health Care Tax Credit can cover up to 50% of the premiums paid by the employer (35% for tax-exempt businesses) for qualifying health insurance plans purchased through SHOP. The amount of the credit depends on the number of employees and the average wages paid.

2. Premium Tax Credit (for Employees Purchasing on the Marketplace)

Although this credit is primarily for employees, it indirectly benefits small business owners. Employees can purchase health insurance through the Health Insurance Marketplace, and those with low to moderate incomes may be eligible for a Premium Tax Credit. This helps lower their monthly premiums.
While not directly affecting the employer’s costs, these credits can make it more affordable for employees to obtain health coverage, reducing pressure on small businesses to provide benefits themselves.

Eligibility Criteria for Small Business Health Care Tax Credit

To qualify for the Small Business Health Care Tax Credit, businesses must meet specific eligibility requirements. These criteria help ensure that only small businesses that truly need financial assistance in providing health insurance are able to benefit from the credit. Let’s break down the key eligibility factors:

1. Size of Business:

The business must have fewer than 25 full-time equivalent (FTE) employees. FTEs are calculated based on the total number of hours worked by employees. For example, two part-time employees working 20 hours per week each would count as one FTE.
The credit is designed to assist small businesses, so larger businesses that do not meet this employee threshold are ineligible.

2. Average Employee Wages:

To qualify for the Small Business Health Care Tax Credit, the average annual wages of employees must be $56,000 or less (as of 2024). This wage cap helps target the credit to smaller businesses that have relatively lower average wages, where the cost of health insurance may be a greater financial burden.

3. Contribution to Employee Premiums:

The business must contribute at least 50% of the cost of health insurance premiums for its employees. This requirement ensures that the credit goes to businesses that are actively investing in their employees’ health coverage, rather than relying solely on employees to bear the cost of premiums.

4. Offering Health Insurance Through the SHOP Marketplace:

To claim the Small Business Health Care Tax Credit, the business must purchase health insurance for its employees through the SHOP Marketplace. The SHOP Marketplace is an online marketplace where small businesses can compare and purchase group health insurance plans. If a business offers insurance outside of the SHOP Marketplace, it will not be eligible for the credit.

5. Other Considerations:

Full-time employees vs. part-time, seasonal workers: While the FTE count includes both full-time and part-time workers, seasonal workers are treated differently. Employees who work fewer than 120 days per year typically do not count toward the FTE calculation.
Tax-exempt organizations: Nonprofits and other tax-exempt organizations can also qualify for the Small Business Health Care Tax Credit, but the amount of the credit they can receive is capped at 35% of premiums (compared to 50% for for-profit businesses).

How to Apply for the Health Insurance Tax Credit

Applying for the Small Business Health Care Tax Credit involves several steps, including gathering documentation and completing the necessary forms. Here’s a step-by-step guide to help small business owners navigate the application process:

Step 1: Determine Eligibility

Confirm that your business meets the requirements for size, wages, and premium contributions. Ensure that you are purchasing health insurance through the SHOP Marketplace and that you are covering at least 50% of your employees’ premiums.

Step 2: Gather Documentation

You will need certain documents to verify your eligibility. These include:
- Your business’s tax returns (such as Form 1120 or 1120-S for corporations, or Form 1065 for partnerships).
- Information on the number of employees and their full-time equivalent status.
- Documentation showing that your business contributes at least 50% of the premium cost.

Step 3: Complete IRS Forms

The application for the Small Business Health Care Tax Credit is done via IRS Form 8941. This form collects information on your business’s health insurance coverage and premium contributions, allowing you to calculate the credit you’re eligible to receive.

Step 4: Submit Forms and Documentation

File Form 8941 along with your business’s tax return. This can be done via paper filing or e-filing depending on your preference or the filing method you use.

Step 5: Keep Records

Be sure to keep detailed records of your application and supporting documents. This will be important in case the IRS requests additional information or if you need to verify your credit in the future.

Key Deadlines

To apply for the credit, you’ll need to file your business tax return by the annual filing deadline. If you file taxes on time, the credit will be applied to your tax year for that period.

Filing Tips for Maximizing Your Credit:

Double-check your employee and wage calculations to ensure they meet the criteria for eligibility.
Ensure that all health insurance premiums and contributions are documented accurately to avoid errors that could delay or disqualify your credit.

Examples of Tax Credit Savings

Understanding how much you could save through the Health Insurance Tax Credit can help you make informed decisions about offering insurance. Below are a couple of examples to illustrate potential savings:

Example 1: Small Business with 10 Employees

Number of Employees: 10 full-time employees
Average Wage: $45,000
Premium Contribution: Business contributes 50% of premiums
Annual Premiums: $400 per month per employee

Estimated Credit:

If this business meets all the eligibility criteria, it could potentially qualify for up to 50% of the premiums paid.
With 10 employees, paying $400 per month in premiums, the business would spend $48,000 annually on premiums.
The credit could cover up to $24,000, reducing the business’s out-of-pocket cost for health insurance.

Example 2: Nonprofit Business with 15 Employees

Number of Employees: 15 employees
Average Wage: $50,000
Premium Contribution: Business contributes 50% of premiums
Annual Premiums: $350 per month per employee

Estimated Credit:

For a nonprofit, the credit would cover up to 35% of premiums paid.
With 15 employees, paying $350 per month in premiums, the business would spend $63,000 annually on premiums.
The credit could cover $22,050, lowering the nonprofit’s premium expenses significantly.

These examples show how the Small Business Health Care Tax Credit can be a valuable tool for small businesses to manage health insurance costs, making it more feasible to offer health benefits to employees.

Common Pitfalls and Mistakes to Avoid

While applying for the Small Business Health Care Tax Credit can be straightforward, there are some common mistakes that small business owners should be aware of:

1. Overlooking Eligibility Requirements

One of the most common pitfalls is not meeting the eligibility requirements—especially the need to use the SHOP Marketplace. If you purchase insurance outside of SHOP, you won’t qualify for the credit.

2. Failing to Maintain the Necessary Employee Contribution Levels

If your business does not contribute at least 50% of the premiums, you will not qualify for the credit. It’s essential to verify your contribution percentage to avoid any issues.

3. Misunderstanding the FTE Calculation

Calculating the number of full-time equivalent (FTE) employees can be tricky. Be sure to correctly account for part-time and seasonal workers to ensure you meet the employee threshold.

4. Missing Filing Deadlines

Late filings can result in losing the credit for that year. Ensure that your business files its tax returns by the deadline to qualify for the credit.

Alternatives and Other Cost-Saving Strategies

If your business does not qualify for the Small Business Health Care Tax Credit or if you’re looking for additional ways to save on healthcare costs, there are other strategies you can explore:

1. Group Health Plans vs. Individual Plans

Offering group health insurance can often result in lower premiums than individual policies. However, you may also consider giving employees the option to purchase individual plans with some level of employer support.

2. Other Tax Incentives and Cost-Saving Programs

Research other tax incentives, such as deductions for health insurance premiums or wellness programs, which can also reduce your overall healthcare costs.

3. Offering Wellness Programs

Providing wellness programs can help reduce healthcare costs over time by promoting healthier lifestyles and reducing the need for expensive medical treatments.

By exploring all of these options, small business owners can make informed choices about providing health benefits while also managing their bottom line effectively.

Conclusion

Navigating the complexities of health insurance for your small business can feel overwhelming, especially with rising premiums and the pressure to provide competitive benefits to attract and retain talent. However, the Health Insurance Tax Credit offers a valuable opportunity to reduce the financial burden of offering health coverage to your employees. By potentially covering a substantial portion of your premium costs, this credit can make health insurance more affordable and accessible for small businesses of all sizes.

If your business meets the eligibility criteria, the Small Business Health Care Tax Credit can help you save thousands of dollars annually, giving you the financial flexibility to invest in other aspects of your business. Whether you’re just starting to explore offering health insurance or have already been providing it for years, understanding how to qualify for this credit—and how to apply—can help you make the most of this tax-saving opportunity.

We encourage small business owners to take the time to evaluate their eligibility for the Health Insurance Tax Credit. The process might seem a bit daunting, but the potential savings are well worth the effort. Make sure to gather the necessary documentation, understand the criteria, and complete the required forms accurately.

To ensure that you’re maximizing your savings and fully compliant with the IRS guidelines, we recommend consulting with a tax professional or an insurance broker. These experts can guide you through the application process, help you avoid common mistakes, and ensure you’re taking advantage of every available benefit. With the right assistance, you can confidently navigate the process and make health insurance more affordable for both your business and your employees.

Now is the time to explore whether your small business qualifies for the Health Insurance Tax Credit—start the process today and unlock potential savings that can benefit your bottom line for years to come.