That health-care tax credit? Good luck qualifying
by John Meara and Julie Welch
Touted as a way to help small business cover employees' health insurance after federal reforms, the tax credit falls well short of expectations.
“I’m from the government and I’m here to help!”
The Patient Protection and Affordable Care Act, signed by President Obama in March, provides qualified small businesses and tax-exempt organizations with a tax credit of up to 35 percent of healthcare premiums. Sounds good; a tax credit for 35 percent of health-care premiums.
Now for the law! Eligible employers are defined as those with 10 or fewer full-time employees (actually extends to businesses with up to 25 employees), paying average annual wages of $25,000 or less (actually extends up to $50,000; excluding the owners and their family members, thank goodness).
OK: Small business means really small, but average annual wages of $25,000 or less means the average employee makes
less than $12.02 per hour. Since owners themselves are exempted from the computations (and the credit for their premiums) qualifying small businesses will need to have a lot of near-minimum wage workers to get a significant credit.
My experience tells me that most businesses with 25 or fewer, predominantly minimum-wage workers don’t normally pay for the employees’ health insurance. So the new credit is intended to encourage the employer to pay for the health-insurance premiums of its workers. In fact, to qualify, the business must pay at least 50 percent of the single-employee coverage premium.
If the average worker earned $25,000 and his or her average health-care premium were only $6,000 per year ($500 per month), that would represent a 24 percent increase in overall compensation. Most small businesses could not afford an increase like that.
Inside the numbers
The government rarely gives anything away without taking something back. So the new law provides that the credit reduces the existing tax deduction that the small business would otherwise be entitled to take. Do the math, and it makes the credit actually 21 percent for a small business in the 40 percent tax bracket (35 percent reduced by 40 percent).
“OMG: We need a CPA!” OK, we are not from the government. We are CPAs. Although we hate to give away our secrets
for getting rich from “new government tax credits,” we have provided a worksheet (see the following page) that may save
you a great deal of time and fees to your CPA to find out if the new credit is worth the effort. The worksheet gives an example of a small business with 18 employees, and individual employees earning from $11,000 to $35,000 per year. Total health-care premiums are $60,000, of which the employer pays $36,000.
Note that the first calculation is to determine the number of full-time equivalent (FTE) employees and average annual wages. Most businesses will find these calculations interesting. They eliminate the impact of interns, part-time employees and other issues that may impact the calculations.
Often, we find that the actual calculations of tax items are simple. It is gathering the data (which rarely is readily available) that runs up the cost. Our educated guess is that the cost of calculating the net benefit to the business could exceed the $2,621 net tax credit shown in the example.
We are aware that there will be small businesses that already pay all of their workers’ health-care premiums and may qualify for substantial net credits, and we have seen examples that calculate credits approaching $25,000, so take the time to make a preliminary computation.
Small charitable organizations are more likely to qualify and get the credit against payroll taxes. So we strongly encourage tax-exempts to calculate the credit. Unfortunately, our worksheet does not deal with all of the tax-exempt issues. We do encourage small businesses that do qualify for a significant credit to take the time now to figure out how to maximize the benefit.
We doubt the government intended it and we do not recommend it, but re-placing a higher-paid employee with a minimum-wage employee appears to increase the credit. Talk about unintended consequences! Maybe the displaced, experienced worker will qualify for unemployment—and government-subsidized health insurance.
Oh, there we go again! Sorry! Really, we should just be saying thanks for the new “Accountants Care Act,” which should increase the fees to CPAs for preparing tax returns.
John W. Meara and Julie Welch are principals with the accounting firm of Meara, Welch & Browne in Kansas City.
P | 816.561.1400
E | john@meara.com
E | julie@meara.com