Question
Dear Tax Talk,
Can you tell me how I can qualify to get the tax credit for health insurance I pay for my employees?
-- Anderson
Answer
Dear Anderson,
Beginning tax year 2010, small-business and even domestic employers can receive a 35 percent income tax credit based on premiums paid to cover employees under the Small Business Health Care Tax Credit. The credit is for a small business, which means a few conditions have to be met. First, the employer has to have fewer than 25 full-time equivalents, or FTEs. Second, the average annual wages should be below $50,000 per FTE, though the credit will be reduced if the annual average wage is greater than $25,000. Lastly, as the employer, you have to pay health insurance premiums under a "qualifying arrangement," which basically means you pay a uniform percentage of not less than 50 percent of the premium cost of coverage for each enrolled employee.
In passing this legislation, Congress gives the Internal Revenue Service a bunch of new terms to interpret. To figure who is a full-time employee you have to look at hours, days or weeks worked by all employees during the year. The magic number here is 2,080 hours, which equals one FTE. If you have four employees each working 20 hours a week for six months of the year, you count the four as one FTE (four employees times 20 hours times 26 weeks equals 2,080 hours).
