Tax Credit Designed to Help Small Businesses Provide Health Insurance

Credit Takes Effect in 2010

August 11, 2010 05:55 pm James Arvantes

As small-business owners, many family physicians who own solo or small practices struggle to provide health insurance for their employees. However, thanks to the recently enacted health care reform legislation, these physicians now may be eligible for a tax credit that they can use to help purchase this health insurance.

The Patient Protection and Affordable Care Act( contains various provisions to help small businesses purchase health insurance for their workers, including a measure that offers a tax credit for small employers (i.e., businesses with fewer than 25 workers and average wages of less than $50,000 per worker) who provide health insurance for their employees.

The tax credit provides as much as 35 percent of an employer's cost for employee coverage and as much as 25 percent of the cost of coverage for employees at nonprofit organizations. The smallest businesses with the lowest salaries (i.e., those that employ 10 or fewer employees who earn an average wage of less than $25,000) are eligible for the full 35 percent tax credit -- 25 percent for nonprofits. The tax credit, which takes effect this year and runs until 2016, phases out as the size of the business and its average per-worker wage increase.

The income of small-business owners is not calculated when determining the tax credit.

In addition, the value of the tax credit climbs to 50 percent from 2014-16 for small businesses that purchase employee health insurance through state-based health insurance exchanges established by the health care reform act. These insurance exchanges are required to be established by 2014.

To qualify for the tax credits, businesses have to cover at least 50 percent of a worker's health insurance premiums. Small employers are eligible for the tax credit even if they already receive assistance from their state to help them purchase coverage for their employees, according to a recent report issued by Families USA and the Small Business Majority.

"A Helping Hand for Small Businesses: Health Insurance Tax Credits(" notes that the eligibility limits for employers with as many as 25 workers include the hours of part-time employees, who will be counted as full-time time equivalents. For example, two half-time workers count as one full-time worker for the purpose of calculating tax credit eligibility.

"This means that part-time workers, who are more likely to be uninsured than their full-time counterparts, may finally be able to obtain job-based health insurance with the help of the small business tax credits," says the report.

Websites Help Small Businesses Navigate the Small Business Tax Credit

The Small Business Majority has an interactive calculator( to help small-business owners determine if they qualify for the small-employers tax credit and the amount they may be able to claim under the credit.

The IRS also provides information on its website( about how to determine whether a small business qualifies for the credit and what needs to be done to claim the credit.

John Arensmeyer, founder and CEO of the Small Business Majority, a national small-business advocacy organization, says the small-business tax credit is tangible and starts immediately. Small businesses, for their part, can file for the tax credit for 2010 on their 2011 tax returns, says Arensmeyer.

"Those who are doing quarterly estimates can take it into account immediately," he adds. In addition, says Arensmeyer, small businesses will not have to fill out an application for the tax credit. "There will be a place on the tax return to put your average salary, number of employees, full-time equivalent employees and how much you spend on health insurance," he explains. "Then you will be able to calculate how much a credit you get."

In their report, Families USA and the Small Business Majority estimate that more than 4 million small businesses may qualify for the tax credit for the purchase of employee health insurance in 2010, which is 83.7 percent of all small businesses in the country. Additionally, more than 1 million small businesses will be eligible to receive the maximum tax credit in 2010, according to the report.

In 11 states -- Arkansas, Montana, Nebraska, South Dakota, Mississippi, Indiana, North Dakota, Missouri, Iowa, West Virginia and Maine -- more than 90 percent of small businesses will be eligible to receive the tax credit for providing insurance in 2010, the report says.

"I think (the tax credit) is going to help a lot of small businesses who have offered coverage to their workers and are now trying to decide whether they can do that over the next couple of years," says Kathleen Stoll, deputy executive director and director of health policy for Families USA and one of the authors of the Families USA and the Small Business Majority report. "It will keep some small-business owners from having to withdraw offers of coverage."

Most small-business owners "want to provide coverage," she adds. "When they can, they do."

IRS 1099 Filing Requirements Expanded

One of the smaller provisions in the health care reform legislation expands the reporting requirements for the IRS' 1099-MISC form. Section 9006, "Expansion of Information Reporting Requirements," in the legislation requires businesses to report all payments for property or goods at or above an annual threshold of $600.

Previously, this requirement only applied to services provided at or above an annual cost of $600. Now businesses will be required to send the 1099 form to all vendors who provided $600 or more in goods or services during the course of a year. The law takes effect in 2012, and the IRS has yet to define all of the individual requirements of the program.

In a larger sense, the tax credit recognizes the challenges small businesses face when trying to provide health care coverage for their workers, according to Stoll and Arensmeyer.

"Small businesses are being killed when it comes to health care costs," says Arensmeyer. "The percentage of small businesses offering insurance to their employees has dropped precipitously in the last 10 years. It was about 65 percent 10 years ago. It is now down to 46 percent."

In 2008, employers with fewer than 10 workers paid $350 more for each employee's health insurance, on average, than firms with 50 or more workers, according to the report. "And the coverage they got for that extra $350 may not have been as comprehensive as what a larger employer got for a lower price," the report states.

One of the overriding goals of health care reform is to reduce health care costs while providing access to affordable coverage. As a consequence, many of the provisions in the health care reform act attempt to make insurance more accessible and affordable for small businesses and their employees.

"A lot of people who are uninsured in this country are tied to the small-business workforce," says Stoll. "They are either owners, workers or the dependents of workers for small businesses."

The small-business tax credit represents the first in a series of initiatives to enhance health care access for small businesses. By establishing health insurance exchanges in 2014, the health care reform act will give small businesses a "simplified system of shopping for and enrolling in health coverage," according to the report.

In 2014, the health care reform act also prohibits insurers from charging businesses higher rates if their workers have pre-existing health conditions, a provision that will make "coverage more affordable for both the owners and employees of small businesses," the report says.