Small Business Health Care Tax Credit

Spencer Sutherland

(courtesy of Zions Bank)

It’s been nearly six months since the passage of the Affordable Care Act (ACA). While carriers, brokers, and employers are busily working to both determine what the changes mean and find ways to implement them, one thing is clear—there are some very tangible benefits for small businesses.

While the federal regulations use penalties to encourage large employers to offer or maintain coverage, small employers are incentivized for their efforts. The Small Business Health Care Tax Credit, created by the ACA, was designed to encourage small employers to offer health coverage, whether for the first time or as a continued benefit.  In 2010, qualifying businesses may earn a federal tax credit of up to 35 percent of their premium payments.

“The government is using both a carrot and a stick to get businesses to provide health coverage—and small businesses get the carrot,” said Greg Matis, senior legal counsel for SelectHealth and Intermountain Healthcare. “If the available tax credit were only a percent or two it might not be worth the hassle, but this is a tax credit of up to 35 percent. That’s very significant for a small business looking to provide health coverage.”


In order to be eligible for the credit, a business must meet three qualifying factors. The business must:

  • Employ fewer than the equivalent of 25 full-time employees;
  • Pay employees (excluding owners and certain others) an average annual wage of less than $50,000; and
  • Pay a uniform percentage of at least 50 percent of the group’s premium cost

Because there is a certain amount of complexity in meeting these requirements, it is prudent for employers to work closely with their tax consultant.

There are also a few types of employers who do not qualify for the credit, including those that are an agency or instrumentality of:

  • The federal government;
  • A state or local government; or
  • An Indian tribal government

However, if such an organization has 501(c) tax-exempt status, it may still qualify for the credit.

Claiming the Credit

One very noteworthy benefit of the credit is that it can be claimed without submitting any additional paperwork to the federal government. Eligible employers claim the credit on their annual income tax return, as part of the general business credit. An unused credit amount may be carried back one year or forward 20 years. The credit can be reflected in estimated tax payments and can offset an employer’s alternative minimum tax liability for the year (subject to certain limitations).

Finding and Keeping the Right Workers

In uncertain times, the tax credit is a very tangible benefit to qualifying small businesses. Not only does it result in a concrete financial gain, but also a definite recruitment advantage, as offering healthcare benefits is key in hiring and retaining quality workers.

For specific details regarding qualification, visit