Tax Tips for Entrepreneurs

Small Business Health Tax Credit

If you have no more than 25 employees, each earning an average annual pay of no more than $50,000, you may be entitled to cash in the form of a small business health tax credit.

Healthcare issues took center stage in the federal government's 2010 legislative efforts.

But while much of the attention was focused on the legislation's impact on patients, the Small Business Health Tax credit stayed under the radar - except for small business owners anxious to receive a government-sponsored refund on premiums and healthcare costs.

The big question is whether the Small Business Health Tax credit will translate into real dollars or whether it is a smoke-and-mirrors stage show that will affect only a handful of companies. Unfortunately, the answer to that question remains to be seen. Although the legislation does provide a tax credit for small business health costs, qualifying for the credit isn't a slam dunk.

As a small business owner, it would be a mistake to not make an effort to qualify for the credit since it can potentially deliver a significant reduction in the overall cost of the health benefits your provide to your employees. Painted with broad strokes, here is what the credit looks like and how it might benefit your business.


The expenses covered under the tax credit are health insurance premiums paid by the employer as a benefit to employees. In addition to basic health insurance, it also covers premiums for enhanced dental and vision coverage. The highest possible credit is equal to 35% of the health insurance premiums the employer paid after January 1, 2010. Do the math . . . If your company qualifies for the maximum credit, you could be talking about a significant dollar return, especially since it is a tax credit rather than a deduction from income.


The devil of the Small Business Health Tax credit is in the qualification details. The credit only applies to companies with fewer than 25 employees earning an average annual wage of $50,000 or less. To determine your qualification status, you'll need to identify the qualifying employees and the number of hours they work. It's possible to have more than 25 employees, but the total FTE (Full-Time Equivalency) can't exceed 25 FTEs. Total wages are then divided by the number of FTEs to arrive at an average wage that is hopefully less than the $50,000 threshold. Business owners, family members, and seasonal workers are excluded from the qualification formula and process.

Issues & Considerations

Many small businesses with fewer than 25 FTEs rely primarily on part-time labor. Since they don't offer healthcare benefits to part-time employees, the tax credit may have little value. Also, businesses with more than 10 FTEs and an average wage of $25,000 are subject to a phase out that prohibits them from receiving the full credit amount.

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