TAX NEWS - JUNE 2010

Delaware Tax: Government offers small businesses health care tax benefits

Small businesses want their employees to be happy. They want them to be healthy.

It's just been tough being able to afford to keep them that way.

With the cost of health insurance benefits continuing to climb, the government has put some of its money where its mouth is when it comes to health care reform. Hoping to encourage more small firms to offer some sort of insurance benefit, the Internal Revenue Service has begun offering some sizable tax incentives, ranging from 25 percent to 35 percent of premiums paid by employers for tax years 2010 through 2013.

In 2014, the credit will go up to 50 percent and can be used for two consecutive years afterward.

"For companies that qualify, the tax benefit can be a tremendous break," said Mark Steber, chief tax officer for Jackson Hewitt Tax Service.

The IRS has already notified 13,992 businesses in Delaware that they might be able to take advantage of the credit.

To qualify, employers must have fewer than 25 full-time equivalent workers and must pay at least 50 percent of the cost of health coverage for each employee. The average employee salary can't be more than than $50,000 a year.

Businesses that have more than 25 employees could still qualify, though, if some of them are part-time. The biggest tax credits are expected to go to firms with no more than 10 employees and an average annual salary between $25,000 and $50,000 per employee.

The credit is one of the first health care reform provisions to go into effect. The credit takes effect this year and has been designed to encourage smaller employers to offer health insurance coverage for the first time or maintain the coverage they already have. Tax-exempt organizations that qualify may receive a credit of up to 25 percent of the premiums paid.

Technically, companies with fewer than 50 employees -- which make up 96 percent of U.S. businesses -- are exempt from the government's new mandate that requires larger business to provide health benefits by 2014 or pay a $2,000 penalty per employee.

But the government hopes the potential of thousands of dollars in savings on premiums will change the minds of very small businesses. As an example, the IRS says an employer with nine full-time workers -- or the equivalent -- who are paid an average $23,000 a year would pay $72,000 on average in health care premiums. In return, the employer would get a tax credit of $25,200.