Small business tax credit eases burden of health insurance

The small business health care tax credit, newly available this year, can help some businesses endure competitive pressures and soaring health insurance costs. The tax credit, part of the federal health care reform law passed in 2010, seeks to aid small businesses or tax-exempt organizations in maintaining or initiating health insurance coverage for their employees.

How does it work?

The IRS recently issued guidelines on eligibility and how to claim the tax credit. If you’re a small employer and want to claim the credit, you’ll need to take a look at IRS Form 8941 or the revised IRS Form 990-T — both available at IRS.gov.

Online calculators can help verify eligibility and determine the credit’s value. The credit is worth up to 35 percent of a small business’ premium costs in 2010 or 25 percent for tax-exempt employers, such as nonprofits. On Jan. 1, 2014, the credit increases to 50 percent for small businesses and 35 percent for tax-exempt organizations.

Most small businesses, such as restaurants, are eligible for a new federal tax credit that helps start or maintain health insurance benefits for employees.

Those eligible for the credit must pay at least half of the health insurance premiums for their employees. The credit’s value varies based on staff size and salaries. An employer with 10 employees earning an average of $25,000 a year gets more than one at the scale’s high end, which tops out at 25 employees earning a yearly average of $50,000.

Who’s eligible?

About 4 million small businesses are eligible for the tax credit, says John Arensmeyer, CEO of Small Business Majority, a nonprofit that focuses on health insurance. That represents nearly 84 percent of all small businesses in the country.

Most small businesses learned about the credit in April 2010, when IRS postcards encouraged them to check eligibility. Another IRS mailing, early in 2011, should boost awareness beyond the current level of roughly 40 percent, Arensmeyer predicts.

“We need to do more work to get the word out,” Arensmeyer says.

What’s the effect?

While a larger credit would have been nice, the current credit is big enough, Arensmeyer says, that many businesses can consider providing health benefits and others may scrap plans to drop or limit health benefits.

Indeed, the relief couldn’t be timelier. A recent report from The Commonwealth Fund revealed that premiums for employer-sponsored family health insurance jumped an average 41 percent from 2003 to 2009 — three times faster than median incomes — and now typically range from $11,000 to $14,000 a year. Premiums equaled or surpassed 18 percent of median household income in 26 states, up from three states in 2003.

At King’s English Bookshop in Salt Lake City, Utah, owner Betsy Burton has found such cost increases disturbing. The tax credit will ease some of the burden of offering health insurance to her store’s 25 employees — a budget item that she says sometimes has eaten up a “ridiculous” one-third of total payroll costs. That’s beyond the threshold (about 30 percent of revenue) where any bookstore becomes financially unsustainable.

Anne Holman, general manager of King’s English Bookshop, says the tax credit will help the store compete against large bookstore chains with deeper pockets.

“Because our margins are so small,” Holman says, “this really makes a difference.”

To obtain the small business health care tax credit, you or your tax preparer must fill out a special IRS form.

Virtually all small businesses feel the effect of continuously escalating health care insurance costs. At Metropolitan Landscaping Management Inc. in Dayton, Md., premiums for the company’s staff of 10 increased 30 percent in a single year, says Marsha Geist, president and co-owner.

Without the new tax credit, Metropolitan Landscaping Management likely would have discontinued health care coverage.

“Somebody has to pay for it,” Geist says, “or it comes out of everyone’s pockets.”

What’s next?

Geist says the tax credit is a positive step, but she thinks the IRS restrictions on income levels should be loosened. In her community, near Baltimore, even a $50,000 annual income isn’t much. Besides taking into account workers in areas with a high cost of living, Geist says, the tax credit should better support companies that employ higher-paid professionals.

Burton, the Utah bookstore owner, says she hopes the IRS targets accountants as well as small businesses in its continuing outreach about the tax credit. Burton says her own accountant learned about the tax credit from her. Also, she says, tax preparers should realize that the credit can be carried forward to future years in certain situations, such as when a business reports an annual loss.

The federal government must do more to trim health care costs and encourage employers to hire or retain older employees, whose insurance customarily costs more than that for younger staff members, Burton says.

Burton acknowledges the tax credit is helpful, “but if costs keep going up, it’s not enough.”

–Dean Lampman

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