Daycare Tax Tips

Small Business Health Care Tax Credit

This federal tax credit will benefit some child care providers

Now that the Affordable Care Act has taken effect, let me be very clear:

Number One: If you are a family child care provider, you do NOT need to offer health insurance coverage to your employees. Only large businesses with 50 or more full-time employees (working 30 hours per week or more) are affected by the so-called "employer mandate" to provide health coverage, which takes effect in 2015.

Number Two: You can choose to offer health coverage to your employees, if you wish, agreeing to cover 100% of the employee premiums or something less.

Number Three: If you pay at least 50% of the cost of employee health insurance premiums, you may benefit from filing IRS Form 8941 to take advantage of the Small Business Health Care Tax Credit for the 2010-2013 tax years, as described in this IRS YouTube Video. The maximum credit is equal to 35% of the employee premiums you paid. You can claim this credit on an amended tax return if you missed it in a prior year. (Within certain time limits.**)

Number Four: Beginning in 2014, the credit will be available to eligible employers for two consecutive taxable years and the maximum credit will increase from 35% of premiums you pay to 50%. However, you will have to purchase insurance through the Small Business Health Options Program (SHOP) Marketplace. (The SHOP Marketplace for California employers is Covered California.)

Details & Qualifications

To Qualify for the Small Business Health Care Tax Credit:

#1 - You must have fewer than 25 full-time equivalent employees (FTEs). This is not a problem for family child care providers! Even if you have only one part-time employee, you can claim this credit.

"Full-time equivalent" means that two half-time workers count as one FTE.

Determine total FTEs by totaling up all employee hours for the year and dividing by 2,080. Then round down to the nearest whole number. However, if you end up with a result that is LESS than one, you get to round up, making one part-time employee is equivalent to one FTE. (When adding up employee hours, count a maximum of 2,080 hours per employee.)

#2 - Average wages paid during the tax year must be less than $50,000.

Determine average annual wages by dividing total wages paid during the year by the number of your full-time equivalent employees (FTEs) calculated in #1 above. According to the Form 8941 instructions, many types of PAID hours count when determing total wages, including paid holidays, vacation time, sick leave, jury duty, etc.

Claiming the Credit:

After calculating the Small Business Health Care Tax Credit on IRS Form 8941, you carry it to IRS Form 3800. The resulting General Business Credit , if not completely used up on your current year tax return, may be carried back or forward to other tax years. You can file an amended tax return** (or use IRS Form 1045) to carry the credit to a prior year.

**Generally, an amended return must be filed within 3 years (including extensions) after the date you filed your original tax return or within 2 years after the date you paid the tax, whichever is later.

Last updated 5 November 2013

Posted on 2013-10-30 05:22:46