Millions of small businesses have or will receive postcards from the IRS alerting them to the new Small Business Health Care Tax Credit and encouraging them to check their eligibility. Even if you don’t receive a postcard, your business still may be eligible.

The Small Business Health Care Tax Credit, included in the health care reform legislation, signed by President Obama on March 23, is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent for tax-exempt organizations. In 2014, this maximum credit increases to 50 percent of premiums paid by eligible small business employers and 35 percent for tax-exempt organizations.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit.

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.

Additional information can be found on the IRS’s website: Small business health care tax credit FAQ.