There has been a lot of discussion surrounding the Affordable Care Act (Obamacare) and its impact on your individual income taxes. Less has been written about the Small Business Health Care Tax Credit, which offers considerable tax incentives to employers using the Small Business Health Options Program (SHOP) Marketplace to provide health insurance for their workers.

This credit will reward you for using the SHOP Marketplace if you are a small business with a handful of employees. You may be able to claim the credit as far back as tax year 2010, when the credit first became available, if all requirements are met.

Here are some basic guidelines to determine your eligibility:

First of all, if you are self-employed, (a freelancer, independent contractor, or consultant, for instance) you will not be eligible to use SHOP to obtain this credit. You have to apply for health insurance through your federal or state Marketplace.

However, if your small business has at least one employee (excluding yourself, a spouse, family member, or owner) you may be able to obtain health insurance for yourself and your employees through the SHOP Marketplace. Other requirements for this credit include:

1. You must have fewer than 25 full-time equivalent employees (FTEs).

2. Your employees must have an average annual salary of less than $52,000 for 2015.

3. You must pay at least half of the employee's health insurance premiums.

4. You must have purchased premiums through the Small Business Health Options Program (SHOP).

While there are plenty of taxpayers who did not take advantage of this credit in 2014, it is still possible to amend your 2014 tax return and claim the credit. The caveat is that this credit is only available for two consecutive years, so if you are planning on amending your 2014 return, you will need to claim the credit in 2015, as well.

Options and advantages: 

The credit is worth up to 50% of the premiums paid for each full-time employee. The amount of the credit varies, so this is where your tax pro can help you.

There are a few options you need to know about when setting up the plan through the SHOP Marketplace website.

  • You can offer a plan of your choice, or, depending on the state, let employees choose between several plans.
  • You can offer health insurance, dental insurance or both.
  • You will decide on the amount you will pay toward your employee's premiums.
  • You can extend the offer of health insurance to the employee's dependents.
  • You will decide on the length of the initial enrollment period and how long new employees must wait before becoming eligible to enroll.

There was no SHOP Marketplace in place for tax years 2010-to- 2013, but you can still claim a credit for up to 35% of health insurance premiums paid for employees during those years. This doesn't count toward the two consecutive years starting in 2014.

Small,  tax-exempt businesses can also get a credit, although at a lesser rate (35% for 2014, 25% for 2010-2013).

Real life example: 

Steve, a mobile IT/Tech Support franchise owner has one full-time employee making $40,000 a year and two half-time employees earning $20,000. 

Since he is eligible, Steve can easily sign up through the SHOP Marketplace online. He can then invite his employees to enroll in the plan he selects online, based on the parameters he establishes regarding eligibility to enroll.

This franchise owner might decide to extend the offer to include the full-time employee's spouse and children but only offer coverage to the half-time employee without their dependents.

After agreeing to pay 50% of the employee's premiums, Steve can calculate the credit he will receive for 2015.

While Steve can use his 2015 tax return for his business as a guideline, he must estimate his earnings for the year of the coverage, in this case 2016. There are some variables that will determine the percentage of the premiums paid for Steve's employees.

In this instance, Steve will pay $20,000 in health insurance premiums. If he qualifies at 40%, that would be a savings of $8,000 for 2016. In addition, he can use the excess contributions as a tax deduction for his business.

Keep in mind that there are certain states and counties that have specific rules regarding health insurance and how it impacts this credit. You should work with your tax professional to make sure you are compliant with these state/county regulations, depending on your location.