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Small Business Health Care Tax Credit

The new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010. The following questions and answers provide information on the credit as it applies for 2010-2013, including information on transition relief for 2010. An enhanced version of the credit will be effective beginning in 2014. The new law, the Patient Protection and Affordable Care Act, was passed by Congress and was signed by President Obama on March 23, 2010.

Eligibility Rules

  • Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.
  • Firm size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
  • Average annual wage. A qualifying employer must pay average annual wages below $50,000.
  • Both taxable (for profit) and tax-exempt firms qualify.

Amount of Credit

  • Maximum Amount. The credit is worth up to 35 percent of a small business' premium costs in 2010. On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers).
  • Phase-out. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

Three Simple Steps for Employers to Qualify

To determine if your small business or tax exempt organization qualifies for the Small Business Health Care Tax Credit, follow the three simple steps on our fact sheet. See if your business qualifies.

The following information is from the Internal Revenue Service at www.irs.gov. To determine if you qualify for the tax credit:


Step One: Determine the total number of your employees (not counting owners or family members).

  • A. Number of full-time employees (who work at least 40 hours per week): __________________________
  • B. Full-time equivalent of part-time employees: __________________________
  • (Calculate the number of full-time equivalents by dividing the total annual hours of part-time employees by 2080.)
  • Add the answers from A and B for total employees: ____________________________

If the total number of employees is fewer than 25, go to step two.


Step Two: Calculate the average annual wages of employees (not counting owners or family members).

  • A. Take the total annual wages paid to employees: __________________________
  • Divide it by the number of employees from step one for the average wage: __________________________
  • (Total wages ÷ number of employees)

If the result is less than $50,000, AND you pay at least half of the insurance premiums for your employees at the single (employee-only) coverage rate, then you may be able to claim the Small Business Health Care Tax Credit.


Example of Employer Receiving Credit:

  • Employees: 10
  • Total Wages: $250,000
  • Average Wage: $25,000 per worker
  • Premiums: $70,000
  • 2010 Credit: $24,500 (35 percent credit)
  • 2014 Credit: $35,000 (50 percent credit)

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