Small business owners who subsidize the cost of employee health insurance premiums may be able to get some of that money back by claiming the credit for small employer health insurance premiums on their taxes. Some of the eligibility requirements, however, limit the number of people a business can employ and the average annual wages they earn. Qualifying as a small employer can reduce your tax bill by the amount of the credit you report on Form 8941.
Benefits of filing Form 8941
The maximum credit increases to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
However, you can include only the premiums for health insurance coverage obtained through the Affordable Care Act's Small Business Health Options Program Marketplace and the credit can be taken for only two consecutive years.
Determining eligibility as a small employer
Only “eligible small employers” can take advantage of the tax credit for small employer health insurance premiums. You are an eligible small employer if:
- You cover at least 50 percent of each enrolled employee's insurance premiums
- Your business has 24 or fewer full-time equivalent employees (FTE)
- The average annual salary you pay for each FTE is less than $50,000
The instructions to Form 8941 include a worksheet to help you figure out the average annual salary.
Employees who qualify as full time
Employing more than 24 people doesn't disqualify you from taking the credit. In fact, you can have 48 half-time employees who work 20 hours each week and still have only 24 FTEs. This is because two half-time employees are equivalent to one full-time employee.
In other words, the IRS allocates 2,080 hours per year—40 hours per week for 52 weeks—to each FTE. If, based on the total hours of service all of your employees worked during the year, you determine there are more than 10 FTEs employed by your company, your credit starts to get reduced, which means you won't get the maximum credit.
Reporting Form 8941 on Form 3800
When taking the credit for small employer health insurance premiums on Form 8941, you'll also need to file Form 3800. Form 3800 is used by business owners to report each of the tax credits that make up the general business credit—which includes the credit for insurance premiums. Therefore, you'll enter the credit amount from Form 8941 in Part 3 of your 3800 form with the other business credits you might be taking. Your overall general business credit will include the health premiums, and the total is entered on your 1040 as a single figure. You do, however, need to file both Form 8941 and 3800 with your return.