The Small Business Health Care Tax Credit helps small businesses, churches, religious organizations and other small tax-exempt organizations afford the cost of providing health care coverage for their employees. It is designed to encourage eligible nonprofit organizations to offer health insurance coverage for the first time or to maintain the coverage they already have. The tax credit specifically targets those with low- to moderate-income employees.
As noted below, the Small Business Health Care Tax Credit is available to eligible tax-exempt organizations even if they have no taxable income for the year.
For tax-exempt employers to be eligible for the tax credit:
- The employer must have fewer than 25 full-time equivalent employees (FTEs) for the tax year. The number of FTEs is determined by dividing the total hours that the employer pays wages to employees during the year by 2,080.
- The average annual wages of the employees must be less than $50,000 per FTE.
- The employer must pay the premiums under a “qualifying arrangement” where the employer covers at least 50 percent of the cost of health care coverage for some of its workers based on the single rate. Church welfare benefit plans may be a qualifying arrangement for purposes of the tax credit.
For small church employers, a church’s minister can be included in the church’s calculation when determining eligibility for the tax credit if the minister is considered an employee – and not self-employed – for purposes of determining the employer’s FTEs. Also, premiums paid by the employer for the health insurance coverage of a minister who is an employee can be taken into account in computing the credit, subject to limitations on the credit. If the minister is self-employed, he or she is not taken into account in determining an employer’s FTEs or premiums paid.
To claim the Small Business Health Care Tax Credit, tax-exempt organizations should include the amount of the credit on Line 44f of Form 990-T, Exempt Organizations Business Income Tax Return. Form 990-T has been especially revised for the 2011 filing season to enable eligible tax-exempt organizations – even those that owe no tax on unrelated business income – to claim the small business health care tax credit.
The maximum credit amount allowed for a tax-exempt employer is 25 percent of the employer’s premium expenses until 2013. In 2014, this amount increases to 35 percent for tax-exempt employers. The amount of the credit cannot exceed the total amount of income and Medicare tax the employer is required to withhold from employee’s wages for the year and the employer share of Medicare tax on employees’ wages for the year.