Its overall impact may be debatable, but one thing the Affordable Care Act doesn’t do is provide much tax relief with one notable exception.
“The bill is mostly a series of tax increases,” says Robert Verzi, CPA, international tax partner with Habif, Arogeti & Wynne, LLP. “But there is one thing in particular that will help small employers: a tax credit for paying premiums for employees.”
Smart Business spoke with Verzi about the tax credit and how to find out if it’s available to you.
How does the tax credit work?
The credit can be claimed if an employer pays a certain amount of premiums it has to be at least 50 percent of the premiums for an employee. Also, the employer must be considered a small business.
For 2010, the credit is 35 percent of premiums paid. It is limited, though. There is a small business benchmark premium. For example, if you paid $6,000 for an employee, there is a cap for how much you can claim. In Georgia it is $4,612 for an individual. For a family it’s $10,598. If you pay in excess of that, you don’t get to claim the credit on the excess premium paid. The IRS gave the different benchmarks for each state. The premiums are different depending on which state you’re in.
Who’s eligible for the credit?
You can’t have more than 25 full-time equivalent (FTE) employees and you can’t have an average annual wage greater than $50,000 for these FTE employees. Small businesses are typically run by their owners. The owners and their families are not counted as FTE employees. Their premiums aren’t counted, but their wages aren’t counted either. That’s good, because it would affect the average wage per person if you included them. If the owner of an S corporation is making $100,000 and he has three employees, his salary and premiums are excluded from the calculation.
There is also a special rule for seasonal employees. If an employee doesn’t work 120 days or more for the company, you can exclude them from calculation, which can be good or bad. Sole proprietors, partners, 2 percent S corp. shareholders and 5 percent owners of corporation and their relations are all excluded. Family members that are employees are excluded, as well.
Part-time employees are included as well as people hired from a professional employment organization (PEO), after figuring out the FTE employees.
How can you determine if you are an eligible employer?
There are two steps. First, figure your FTE employees, then figure out your total wages to all these eligible employees. Exclude seasonal workers, sole proprietors and the others mentioned earlier.
Then, determine if you are under the 25-employee threshold. Figure out all the wages you paid to eligible employees, excluding the wages you’ve paid to S corp. shareholders, business owners, etc. Then you divide the total wages paid by FTE employees, and figure your average wage per person.
You then do your phase out calculation. Do you have more than 10 employees? If so, you get phased out up until 25 employees. At that point you are fully phased out. If you have an average wage per person of more than $25,000, you get phased out up until you get to $50,000.
To figure out your credit, you multiply that times your wages and subtract your phase-out amounts for your total eligible credit, which gives you your net credit allowed. Once you figure that out, you factor that into your estimated tax payments that are due in September and January.
What do small business owners need to do to take advantage of these credits?
You are probably going to need the help of your accountant at this point to review the calculations and how it will affect your amount of taxes due in 2010. The IRS has just issued a draft tax form that will be used to calculate the credit Form 8941. I suggest that you take a look at this form and perform a preliminary calculation. You could wait until the forms come out and not factor it into your estimated payments, but it’s better to do this sooner.
Many business owners have not figured their FTE employees or average wages, so they need to come up with a system to track this and figure it into their estimated tax payment planning. New data points they would not have normally been concerned with are now something they need to keep track of.
If you have people who are close to that seasonal threshold, figure out if it is better to have them work another day to have them qualify or one day less not to qualify. Find out what impact it would have on your credit.
What other provisions in the act affect businesses?
The other changes are more negative. An important one that people haven’t really focused on is the additional 1099 reporting. Starting in 2012, if your business pays a corporation $600 or more in a calendar year, you must report the total amount on an information return. Under current rules, payments to corporations are normally exempt from reporting. In order to properly complete Form 1099, you will need the tax identity number of the company to enter on the form. If you can’t get this number, then backup withholding of 28 percent may apply. This will be a real headache for businesses. There is a $100 penalty (or more in some cases) for each failure to disclose on a 1099.
Before 1099 forms were just for services, now they will be for property and services. The change is designed to catch the business-to-business transactions that aren’t being reported and bridge the ‘tax gap.’
Robert Verzi, CPA, is an international tax partner with Habif, Arogeti & Wynne, LLP with more than 22 years of experience providing international tax solutions to publicly and privately held corporations on an array of international tax matters, such as foreign tax credit management and utilization, structuring foreign and domestic operations, international mergers and acquisitions, and export tax incentives. He also has many years of experience serving foreign-owned U.S. businesses. Reach him at (404) 898-8486 or email@example.com.