Written By: Thomas L. Broderick, C. P. A.,Treasurer of Pickens-Kane, Chicago, Illinois
The new health insurance reform package (Affordable Care Act was enacted on March 23, 2010) includes an immediate tax break for qualified small businesses: the Code Sec. 45R small employer health insurance tax credit. Qualified moving & storage companies (other companies and non-profit organizations may qualify for some or all of this credit) may reduce the cost of providing health insurance to their employees this year through the year 2013. The tax credit is retroactive to January 1, 2010. You may have received a postcard from the IRS announcing this tax credit.
Employers that have no more than 25 full-time equivalent (FTE) employees paying wages averaging less than $ 50,000 for each employee per year qualify for this tax break. To determine eligibility for the credit, you have to calculate the number of FTEs and the average annual wages. See the applicable descriptions for these calculations later in this article. Also see the 3 Simple Step worksheet developed by the Internal Revenue Service as part of this article that will help determine if you may qualify for this credit.
Since many moving & storage companies are family owned, it is important to point out some limitations in this tax credit:
- Generally, a sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit. Thus, the wages or hours of these business owners and partners are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.
- A family member of any of the business owners or partners or a member of such a business owner’s or partner’s household, is not considered an employee for purposes of the credit. Thus, neither their wages nor their hours are counted in determining the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit. For this purpose, a family member is defined as a child (or descendant of a child); a sibling or step-sibling; a parent (or ancestor of a parent); a step-parent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.
Tax Credit Amount
The maximum tax credit is 35% of the qualified health care premiums paid by the employer for its employees. However, the moving & storage company must pay premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage to qualify for the credit. The credit is subject to phase-out rules. The credit is reduced by 6.667 percent for each FTE in excess of 10 employees. The credit is also reduced by four percent for each $ 1,000 that average annual compensation paid to employees exceeds $ 25,000. This means that the credit completely phases out if the moving & storage company has 25 or more FTEs and pays $ 50,000 or more in average annual wages.
There are some other limits that apply to the amount of the premiums paid that can be considered for this credit. These limits may be determined by the Department of Health and Human Services (HHS).
This is determined by dividing the total hours of service (including paid time off) for all employees (but not more than 2,080 hours for any employee) by 2,080. The result, if not a whole number, is rounded to the next lowest whole number. The 2,080 hours comprise the number of hours in a 52-week period assuming a 40-hour work week. Any hours beyond 2,080, such as overtime hours, are not taken into account when calculating FTEs.
Average Annual Wages
This is determined by first dividing the total wages paid by the moving & storage company to employees during the year by the number of FTEs (calculated per above) for the year. The result is then rounded down to the nearest $ 1,000 (if not otherwise a multiple of $ 1,000). Remember to exclude from the total wages any wages paid to an employee for hours in excess of 2,080.
Example of Moving Company Receiving Credit
Moving & Storage Co. with 12 employees in 2010:
Employee Class Number Wages
Drivers 2 $ 60,000
Helpers 5 $ 100,000
Warehouseman 2 $ 45,000
Dispatcher 1 $ 35,000
Salespersons 2 $ 60,000
Owner/Family N/A N/A
Totals 12 $ 300,000
Average Wage per Employee $ 25,000
Employee Health Care paid by Company $ 72,000
2010 Health Care Credit @ 35% $ 25,200
Claiming the Credit
The credit is a general business credit that will be claimed on your annual income tax return.
Investing in business assets or employees is never just a matter of taxes. Please consult with your tax advisor before acting on this topic. Your tax advisor can ensure you receive the maximum tax benefits considering your company structure, income tax rates, etc. You can also visit the Internal Revenue Service web site http://www.irs.gov/ for more information on this issue.
Thomas L. Broderick, C. P. A. is the Treasurer of Pickens-Kane Moving & Storage Co. in Chicago, Illinois. He has served as Chairman of the Board of Trustees of the Illinois Movers’ and Warehousemen’s Risk Management Trust since 1996. Many individuals, small businesses and non-profit organizations consult him for various accounting, investment, insurance and tax issues.
3 SIMPLE STEPS
If you are a small employer (business or tax-exempt) that provides health insurance coverage to your employees, determine if you may qualify for the Small Business Health Care Tax Credit by following these three simple steps:
1 Determine the total number of your employees (not counting owners or family members):
Full-time employees: _____________________________
(enter the number of employees who work at least 40 hours per week)
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.)
= ______________________ total employees
If the total number of employees is fewer than 25 GO TO STEP 2
2 Calculate the average annual wages of employees (not counting owners or family members):
Take the total annual wages paid to employees: ______________________________
Divide it by the number of employees from STEP 1: ___________________________
(total wages ÷number of employees)
= ______________________ average wages
If the result is less than $50,000, AND
3 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. Find out more information at IRS.gov.