Running a small business today is expensive, especially when you factor in employee health care costs. The good news is small business owners can recoup some of the costs of small business health insurance and even lower their overall business taxes.
The government offers incentives to help manage the expense of contributing to employee health insurance plans. Credit for Small Employer Health Insurance Premiums, Form 8941, provides a tax credit to qualifying small businesses.
If you qualify, it can help you reduce your taxes significantly.
Here’s what you need to know about Form 8941.
How Does IRS Form 8941 Work?
IRS Form 8941 is a tax form that is used to calculate the amount of credits that small business owners may be eligible for based on their health care expenses. It outlines the specific requirements that must be met in order to qualify for the credit, including applicable wages and full-time employee counts. This form can be used by employers who have 25 or fewer employees and who pay at least average annual wages of $52,000 or less to their workers.
In addition, the employer must cover at least 50% of its employees’ health insurance premiums in order to qualify for the credit outlined on Form 8941. Furthermore, employers must meet certain other criteria such as having taxable income below certain amounts and offering coverage through a qualified plan. The information reported on this form is then used to determine the amount of portion of a possible 35% or 25% tax credit for which an employer may qualify. All employers claiming a tax credit must submit IRS Form 8941 with their federal taxes in order to receive any credits they are due.
What Is the Small Business Health Care Credit?
This credit is available to qualifying small businesses to offset some of the costs of insurance premiums. To qualify, you must offer a health plan for your employees through the Small Business Health Options Program Marketplace (SHOP).
As a small business owner, you must pay 50% of the costs and have fewer than 25 full-time employees, averaging less than $55,000 in salary per year. To claim the credit, you will need to file IRS Form 8941 on your business tax return.
This is not a yearly credit. Small business owners can claim health insurance for small business credit for two consecutive years, and that’s it.
Tax Credit Requirements
To qualify for the Small Business Health Care Tax Credit, you must meet a few strict requirements. These include:
Full-time Equivalent Employees
For this tax credit, a small business is one that has fewer than 25 full-time equivalent employees (FTF). The IRS considers FTF to be an employee who works at least 2,080 hours a year.
If you have part-time employees, this can get tricky. if you have multiple part-time employees, you can combine hours to count as full-time employees.
You must determine how many hours each part-time employee works. There are three ways to do this.
- Actual hours worked: Track employee hours, including vacation, holidays, and sick time
- Days Worked: Count work days as 8 hours of service (Multiply days x 8 hours per day)
- Weeks worked: Assume a work week is 40 hours and calculate the same as the days-worked equivalency method
For example, an employee who works 45 weeks per year and took 7 weeks off without pay has worked 1,800 hours in a year. Owners and their families don’t count as FTEs. This includes:
- The owners of a sole proprietorship
- A partner in a partnership
- An owner who owns over 5% of the business
- S-corporation shareholder who owns over 2%
Salary Less Than $55,000
To qualify for this small business health care credit, the average employee wage you pay for the year must be less than $55,000 for full-time equivalent employees.
To calculate average wages, take the total wages you pay full-time employees and divide them by the number of employees. For example, if you paid $320,000 in total wages for eight full-time equivalent employees, the average wage would be $40,000.
Qualifying Health Care Premiums
To receive this credit, you must pay a portion of your employees’ insurance premiums. You must offer a qualified plan to your employees from SHOP and pay at least 50% of these costs.
When to Claim
You can still take advantage of this credit even if you don’t owe any taxes. It’s not limited by how much you pay in taxes for the year.
If you don’t have taxable income for the year, the credit can apply backward or forward instead.
Form 8941 Key Benefits
The Small Business Health Care Credit saves employers money that they would otherwise have to spend on taxes. This money can be poured back into your business.
Form 8941 indirectly incentivizes business owners to provide health coverage for employees. Many eCommerce employers who cannot afford to provide employee coverage are able to do so with this tax savings benefit.
This makes health insurance for businesses a more affordable option.
Retaining Top Talent
Today’s employees have options. Providing health benefits can make a difference in the talent you recruit.
When job seekers are weighing their options, they often look for total compensation rather than just salary. Employer-provided benefits can make a huge difference in attracting and retaining top talent.
This is especially true for job seekers with families.
The IRS does impose a limit on the number of times a small business owner can claim this credit. For tax years following 2013, small business owners can claim the credit for two consecutive tax-year periods.
How Do I Apply?
How you apply for Form 8941 depends on the structure of your business. Tax-exempt small employers, partnerships, cooperatives, S corporations, estates, and trusts must file IRS Form 8941 with their tax returns to claim the health care credit.
Other qualifying businesses should report this credit on line 4h in Part III on Form 3800, general business credit. All of these conditions and requirements can make claiming Form 8941 benefits confusing for the average business owner.
Consult a tax professional for the best results claiming this tax credit. If you provide employee health insurance, you don’t want to miss out on this money-saving benefit.
Download The Most Up-to-Date Form 8941
IRS Form 8941 FAQs
Form 8941 is used by eligible small employers to calculate the credit for small employer health insurance premiums. It should be filed by small businesses that provide health insurance coverage to their employees and meet certain criteria outlined by the IRS.
To complete Form 8941, you will need to provide details about the number of employees covered, the total premiums paid, and any premium assistance received. Additionally, you will need to calculate the average annual wages of your employees.
The IRS provides specific eligibility criteria for the small employer health insurance credit. These criteria consider factors such as the size of your business, the average annual wages of your employees, and the premiums you pay. Review the guidelines provided on the IRS website or consult with a tax professional to determine if your business qualifies.
Yes, there is a maximum credit amount that can be claimed based on the premiums paid and the average annual wages of your employees. The IRS provides a formula to calculate the credit, which takes into account these factors. You can find the specific calculation method on the IRS website or within the instructions for Form 8941.
Yes, if the credit exceeds your tax liability for the current year, you can carry it forward to future tax years. However, you cannot carry back any unused credit. The IRS provides instructions on how to handle unused credits on Form 8941.
Yes, there are certain limitations and restrictions on claiming the small employer health insurance credit. For example, you cannot claim the credit if you have more than 25 full-time equivalent employees, or if the average annual wages of your employees exceed a certain threshold. Review the IRS guidelines and instructions for Form 8941 for detailed information on these limitations.
For additional resources and guidance on completing Form 8941, you can refer to the official IRS website. The IRS provides detailed instructions and publications related to this form, including Publication 8941, which specifically focuses on the small employer health insurance credit.
Small Business Health Insurance
Form 8941 provides an outstanding benefit for qualifying small businesses. It could help you reduce your tax bill by as much as 50% for costs associated with small business health insurance.
As a business owner, it’s an opportunity you want to take advantage of. This credit can save you money while helping you recruit and retain top talent.
At ERC Today, we strive to help business owners receive the maximum tax benefits they’re allowed. If you’re interested in learning more about tax benefits for your small business, we’d love to help!
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