Okay, let’s talk about Form 8941. You might be thinking, “Another tax form? Ugh!” But stick with me. This one could actually save your small business some money! Form 8941 is all about the Credit for Small Employer Health Insurance Premiums. Basically, if you’re a small business that offers health insurance to your employees, you might be eligible for a tax credit. This credit can reduce the amount of taxes you owe, which is something everyone can get behind, right?
What’s the Deal with the Small Employer Health Insurance Credit?
Let’s be real, providing health insurance for your employees is not cheap. It’s a big expense for any business, and even more so for smaller ones. The government, wanting to encourage small businesses to offer this important benefit, came up with this credit. Think of it as a thank you for taking care of your team’s health. The credit aims to help small employers offset the cost of providing health insurance. It’s not available to everyone, however, so let’s dig in to see if it fits your business.
Who Can Use Form 8941? Eligibility Requirements
So, how do you know if you can actually use Form 8941 and claim this credit? There are a few key eligibility requirements.
- Small Employer: First and foremost, you have to be a small employer. This generally means you have fewer than 25 full-time equivalent (FTE) employees. We’ll discuss the definition of FTE in more detail in a bit, but don’t worry if you’re not sure exactly what that means yet.
- Average Annual Wages: The average annual wages of your employees must also be less than a certain amount per employee. This threshold is adjusted yearly for inflation.
- Offer Health Insurance: You also have to offer health insurance coverage through a qualified plan for all of your employees. You can’t just offer it to a select few. There is some variation for those who operate in the small group market, but generally this means all full-time employees need to have the option.
- Contribution Requirements: For tax years beginning after 2013, you generally have to pay at least 50% of the premium cost for each employee.
- Tax Exempt Status: You generally must have a non-profit tax exempt status to qualify for this credit. There are some exceptions for certain businesses, but you’ll generally have to meet other criteria if not a non-profit.
- Special Note for the Self Employed: The self employed cannot claim this credit for themselves. They could claim it for employees of their business, if otherwise qualified.
It’s important to note that the rules for this credit can get a bit complicated, so don’t hesitate to seek professional advice. It is also important to note that the amount of credit that you can claim is limited, and is further limited to the amount of tax liability you have.
Understanding Full-Time Equivalent (FTE) Employees
It is time for a quick detour. You’ve likely heard of full-time employees. For purposes of this credit, however, it is crucial that we discuss full-time equivalent employees. Because it’s not always as simple as it sounds!
- FTE Calculation: An FTE is a way to combine full-time and part-time employees into one measurement. To calculate it, you add up all the hours worked by all your employees and divide by 2,080 (which represents a typical 40-hour per week full time worker’s hours). This calculation can include not only your full-time employees but also part-time employees.
- Example: Let’s say you have 10 employees who each work 20 hours per week and 2 full time employees (40 hours per week). 10 employees x 20 hours = 200 total hours. 2 employees x 40 hours = 80 total hours. 200 + 80 = 280 total hours per week. Let’s assume those hours are consistent for the full year. 280 hours per week x 52 weeks per year = 14,560 total hours per year. 14,560/ 2080 = 7 FTE employees.
- Why It Matters: The number of FTE employees you have is a crucial factor in determining whether or not you qualify for the credit. Remember, to qualify, you must generally have fewer than 25 FTEs.
Understanding Average Annual Wages
As previously mentioned, you must also meet an average annual wages requirement. This refers to the total annual compensation paid to your employees. Let’s get into some specifics.
- How It’s Calculated: To figure out your average annual wages, you add up all the wages (as defined by the credit, which generally includes income subject to income tax withholding) paid to your employees. Then you divide this total by the number of FTE employees.
- Yearly Threshold: This limit is adjusted annually, so be sure to check the IRS guidelines to find the correct threshold for each tax year. If your average wage per employee is above this threshold, you might not be eligible for the credit.
- Why It Matters: This requirement ensures that the credit primarily benefits smaller businesses that pay lower wages and are therefore more likely to need assistance offering employee benefits.
How Does the Credit Work?
The credit itself is usually a percentage of the premiums you pay for your employees’ health insurance. The percentage amount you are allowed can vary, and for a very small employer it can be up to 50% of your eligible premium costs. The tax year in which the credit is claimed will also have an effect on the amount of the credit.
- Claiming the Credit: To claim the credit, you need to complete Form 8941 and attach it to your business tax return (Form 1040 or applicable partnership or corporate income tax returns). The instructions for Form 8941 will walk you through the process. It may be best to work with a tax preparer or CPA to complete.
- Carryforward/Carryback: If your business doesn’t owe enough in taxes to use the whole credit, there may be circumstances that will allow you to carry the credit forward to future tax years, or backwards.
What Kind of Health Insurance Plans Qualify?
So, what kind of health insurance plan counts toward this credit? Here’s the breakdown:
- Qualified Health Plans: Generally, you need to offer a health insurance plan that is considered a “qualified health plan,” as defined by the Affordable Care Act (ACA). This generally means it will be a plan sold through the small group marketplace, as determined by the ACA.
Examples to Illustrate Form 8941
Let’s look at a couple quick examples to make all of this clearer:
- Example 1:
- A small nonprofit organization has 15 FTE employees.
- Their average annual wages are below the threshold, as defined in the tax code.
- They offer a qualified health insurance plan for all of their employees and pay more than 50% of the premium.
- They may be able to use Form 8941 to claim the credit.
- Example 2:
- A restaurant with 30 FTE employees
- The average annual wages are over the threshold as defined in the tax code
- Even though the restaurant offers a qualified health insurance plan, they would not be able to use Form 8941 to claim the credit because they are over the FTE employee threshold.
Common Mistakes and Misconceptions
- Thinking You Don’t Qualify Because You’re Not a Non-profit: While non-profits are the primary beneficiaries, there may be some scenarios where an for-profit business can still claim this credit, for example in the small group marketplace.
- Miscalculating FTE Employees: Make sure you understand exactly how to calculate your FTEs or you could miss the credit.
- Skipping Form 8941: Even if you think you might not be eligible, it’s worth it to take a few minutes to calculate your business’s qualifications.
Tips and Strategies
- Seek Professional Help: It’s highly recommended to work with a tax advisor or accountant to determine your eligibility. They can help you navigate the complexities of the tax code and ensure you are claiming all applicable credits.
- Keep Accurate Records: Keep meticulous records of your employee hours, wages, and health insurance premiums. This is crucial for completing Form 8941 correctly and accurately.
- Stay Updated: Tax laws and regulations can change, so be sure you are staying up to date with any changes that may affect the amount of credit you are eligible for.
Key Takeaway
Form 8941 could be a significant benefit for eligible small businesses that offer health insurance to their employees. Taking the time to understand your eligibility and correctly fill out the form could reduce your tax bill. And who doesn’t love a lower tax bill?