September 22, 2010
IRS Form 8941 Helps Small Business Owners With Tax Credits
For tax years beginning in 2011, many small businesses and tax exempt organizations may become eligible to claim health care tax credits using the recently released Form 8941.
Although it is still in draft form, Form 8941 Credit for Small Employer Health Insurance Premiums is the calculation of the credit designed to encourage small employers to offer health insurance for the first time or maintain coverage they already have, as typically small businesses employ moderate and low income workers who would otherwise not be able to afford health insurance coverage.
Form 8941 will be attached to the annual income tax return for the business beginning in 2011. For purposes of this Form, Small Employers are both small taxable and Section 501(c) tax-exempt employers. Note that tax-exempt organizations will claim the credit on a revised Form 990-T (not yet released) instead of Form 8941.
Eligibility for the Small Business Tax Credits are based on the following factors:
- Number of full time equivalent employees (FTE). Please note that in total, FTE is not based strictly on the physical number of employees, but rather a calculation (see "three simple steps") based on the total annual hours of part-time employees. In order to qualify, the business must have fewer than twenty five FTE. FTE excludes owners (sole proprietors, a partner in a partnership, an S Corporation shareholder owning more than 2% or any other type of owner owning more than 5% of the business), family members, and seasonal workers who are employed less than 120 days per year.
- Average annual wages of employees must be less than $50,000 per FTE in order to receive the full credit. The credit is reduced per employee as the wages and number of FTE increases up to 25 FTE (and is phased out for those employers who have over 25 FTE). The amount of annual wages is determined by dividing the total wages paid by the employer during the employer’s tax year by the number of employer’s FTEs for the year. The result should be rounded down to the nearest $1,000 and should include only wages for FICA purposes.
- The employer must have a qualifying arrangement, defined by the IRS as an arrangement in which the employer contributes at least 50% of the total premium cost per employee enrolled in health insurance coverage. This is based on single coverage only – when an employee maintains family coverage, this requirement is met once the employer contributes at least 50% of the premium as if said employee had single coverage.
Calculation of the Credit:
The credit calculation considers only health care premiums paid by the employer to a health insurance company or HMO. If the employer pays only a portion of this cost, with the employee paying the balance, only the portion paid by the employer will be considered in the credit calculation. The maximum credit for a qualified employer is 35% if the employer’s premium expenses that count towards the credit. The maximum credit for tax-exempt qualified employers is 25%, not in excess of the total amount of income and Medicare tax the employer is required to withhold from employee wages for the year.
The Federal tax credit as described here will not be reduced by similar state tax credits. The credit may be used to offset an employer’s AMT liability for the tax year, subject to limitation. For taxable employers, the credit can only offset actual tax liability, but can be carried back one year and forward 20 years like a general business credit. For tax-exempt employers, the credit is refundable so even if there is not taxable income in the year generated, the employer can receive a refund as long as the amount is not in excess of its income tax withholding and Medicare tax liability.
Comments on the draft Form 8941 may be submitted to the IRS within thirty days. The final version of Form 8941 and instructions is scheduled to be released later this year, along with an updated Form 990-T.
If you think your company may be eligible for Small Business Health Insurance Credits, or if you have any questions related to business tax credits, please contact your Marcum Tax Professional.