The health care reform legislation enacted in March 2010 provides a tax credit to encourage small employers (those with less than 25 employees and average wages below $50,000) to provide health insurance for their employees. The Congressional Research Service (CRS) issued a report April 8 that highlights the impact of the newly enacted health law on small employers, including the benefits of the small employer tax credit.

The IRS has recently issued updated guidance on the small employer credit provision, section 45R of the Internal Revenue Code. The IRS will be providing further guidance to qualifying tax-exempt organizations on how to claim the credit in the near future:

• Small Employer Credit - IRS guidance (PDF) New
  
• The small employer credit: answers to frequently asked questions
• IRS issues published rates for credit calculation

How It Works

From 2010 - 2013, all eligible small employers that contribute at least 50 percent of the total premium cost for their employees' health insurance (or 50 percent of a benchmark premium) would receive a tax credit.  Eligible nonprofit employers would receive a credit of up to 25 percent of the employer contribution which they would apply to taxes they pay or withhold for their employees; employees would still receive full credit for taxes withheld from their pay. Eligible for-profit employers would receive an income tax credit for up to 35 percent of the employer contribution for employees' health care coverage.

In 2014 and beyond, all eligible nonprofit employers that purchase coverage for their employees through a state insurance exchange would receive a credit of up to 35 percent of the employer contribution for employees' coverage which would be applicable against payroll taxes they withhold or pay for their employees.  Eligible for-profit employers that purchase coverage for employees through a state insurance exchange would receive an income tax credit for up to 50 percent of the employer contribution for employees' health care coverage applicable towards income taxes they owe.

Background

Independent Sector and its members worked with Congress to ensure that incentives for employers to provide health care coverage to their employees would apply to both for-profit and nonprofit employers.   The Senate Finance Committee first included the provision extending the small business tax credit to nonprofit employers, and House leaders subsequently adopted the Senate provision following strong efforts by Rep. Betty McCollum (D-MN), Rep. Donna Edwards (D-MD), and 41 other representatives who joined their January 2010 letter to House leaders.