What help do small businesses get when providing employee health insurance plans?

Small Business Tax Credits

Despite the fact that small firms pay more in premiums than large companies do, many small business owners have shouldered those costs to provide insurance for their employees. To reward those owners, and to entice more small businesses to offer insurance now, the Affordable Care Act includes a tax cut for people who own small businesses. The White House estimates that 4 million small businesses could qualify for this tax cut; the administration also estimates that the tax break could provide $40 billion in savings for these businesses over the next 10 years [source: White House].

To be eligible for the maximum tax credit, the business must be comprised of 10 or fewer full-time employees, and average annual wages must be less than $25,000. Businesses of 25 or fewer full-time employees and average annual wages of less than $50,000 are also eligible for a lesser tax cut. In either case, the employers must contribute at least 50 percent to the total premium cost. From now until 2013, these employers are eligible for a maximum credit of 35 percent of their contributions toward the workers' insurance premiums. Non-profit businesses are also eligible for the tax credit if they meet the other qualifications, but their tax credit maxes out at 25 percent of the employer's contribution toward premiums. In 2014, the tax credit becomes even larger -- the maximum credit will be 50 percent (35 percent for tax-exempt businesses). The 50 percent tax credit is available for two years.

The White House uses the example of a small-town mechanic who owns his own business to explain how the tax credit would work. If the mechanic has 10 full-time employees who are paid a total of $250,000 ($25,000 per worker), the mechanic is eligible for the maximum tax credit. If the mechanic pays $70,000 toward premiums, then his tax credit in 2010 would be $24,500, while his tax credit in 2014, when the tax credits increase, would be $35,000. A quick caveat: The owner of the small business can't be included in the count of full-time employees, and neither can close family members of the owner. Information on calculating your own tax credit can be found at irs.gov.

The National Federation of Independent Businesses, a lobbying group, complains that this tax credit only helps very small businesses. Still, many small businesses are eligible for some percentage of the credit, and the White House is hopeful the credit will help those businesses until 2014, when the exchanges open. Ideally, this new access to affordable health insurance will help more small businesses provide coverage, which could make working at a small firm -- or starting one up -- more appealing to more Americans, who may be afraid to leave their jobs lest they lose their insurance.

For more on the Affordable Care Act, see the links below.

Related Articles


  • DeMause, Neil. "What health care reform means for your business." CNN. March 22, 2010. (Aug. 26, 2010)http://money.cnn.com/2010/03/22/smallbusiness/small_business_health_reform/
  • "Fact Sheet: Small Business Health Care Tax Credit." White House. April 1, 2010. (Aug. 26, 2010)http://www.whitehouse.gov/the-press-office/fact-sheet-small-business-health-care-tax-credit
  • HealthCare.gov Web site. U.S. Department of Health and Human Services. (Aug. 26, 2010)http://www.healthcare.gov/
  • IRS Web site. (Aug. 26, 2010)http://www.irs.gov
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  • Khan, Human. "Will New Health Care Law Really Help Small Businesses?" ABC News. April 1, 2010. (Aug. 26, 2010)http://abcnews.go.com/Politics/Business/obama-touts-health-care-bills-tax-credit-small/story?id=10261138
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  • Montgomery, Lori. "Millions of small businesses could be eligible for health care tax credits." Washington Post. May 17, 2010. (Aug. 26, 2010)http://www.washingtonpost.com/wp-dyn/content/article/2010/05/17/AR2010051701441_pf.html
  • Pickert, Kate. "Understanding Five Immediate Benefits of Health Reform." Time. April 21, 2010. (Aug. 26, 2010)http://www.time.com/time/specials/packages/article/0,28804,1983409_1983408_1983405,00.html
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  • Seelye, Katharine O. "Employer Mandate Becomes Sticky Issue in Reconciling Bills." New York Times. Oct. 31, 2009. (Aug. 26, 2010)http://prescriptions.blogs.nytimes.com/2009/10/31/employer-mandate-becomes-sticky-issue-in-reconciling-bills
  • "The Affordable Care Act: Increasing Choice and Saving Money for Small Businesses." White House. (Aug. 26, 2010)http://www.whitehouse.gov/files/documents/health_reform_for_small_businesses.pdf
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