Beginning in 2010, certain small employers can claim a credit for health insurance premiums paid. If a taxpayer qualifies, the credit can be used to reduce any federal income tax owed. A tax-exempt organization can also qualify for the credit. In the case of a tax-exempt organization, no tax is owed; therefore, the tax cannot be reduced. Instead, a tax-exempt organization can be issued a cash refund.
A taxpayer calculates the credit on Federal Form 8941. For tax-exempt small employers, the credit is generally 25% of premiums paid, and is limited to the amount of certain payroll taxes paid. A tax-exempt entity then transfers the credit to Form 990-T (Exempt Organization Business Income Tax Return) to claim the refund. If an organization was eligible for the credit in the past, a refund claim can be made for any open tax years (generally three years).
In general to qualify for the credit, an organization must meet three requirements:
- The organization must have paid premiums for employee health insurance coverage under a qualifying arrangement. A qualifying arrangement is generally an arrangement that requires you to pay a uniform percentage (not less than 50%) of the premium cost for each enrolled employee’s health insurance coverage.
- The organization must have fewer than 25 full-time equivalent employees.
- The organization must have paid an average annual wage for the tax year of less than $50,000 per full-time equivalent employee.
If you work for or are associated with a tax-exempt small employer and would like more information, please contact the tax professionals at Schneider Downs.
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