So You Think Your Small Business Tax Credit Is Coming Soon? Our Our webinar will will begin begin shortly shortly To To invite invite someone else else to to the the webinar, have have them them go go to to www.joinwebinar.com, enter enter webinar id: id: 966-140-041 Please Please visit visit our our blog blog after after the the presentation to to download the the ppt ppt file: file: http://myknowledgecenter.com/businessinsurance/tax-credit-webinar/ Presented By: Peter A. Frittitta Vice President, Benefits Practice April 28, 2010
If You re Confused, You re Not Alone
Did You Receive A Postcard From The IRS? Postcards Mailed 4/19 & After Wisconsin 88,970 Total 4,441,147
Small Business Health Care Tax Credit Which employers are eligible? What are the criteria that affect the credit? How do you calculate the credit? Some quick & easy examples A comprehensive example (based on a poll) How do you claim/receive the credit?
Some Other Simple Housekeeping Rules
Eligibility Rules Both taxable (for profit) and tax-exempt firms qualify. Providing health care coverage. A qualifying employer must cover at least 50% of the cost of health care coverage for some of its workers based on the single rate. Firm size. A qualifying employer must have less than the equivalent of 25 full-time workers Average annual wage. A qualifying employer must pay average annual wages below $50,000.
Eligibility Definitions/Calculations Full-Time Equivalent Employees Average Annual Wages Eligible Expenses for the Credit Quick & Easy Example for Each A Comprehensive Example Audience Chooses Example based on poll results
Full-Time Equivalent Employees Calculated by multiplying the total number of hours of service for which wages were paid by the employer to employees during the taxable year divided by 2080 (40 hrs/wk X 52 weeks). Rounded to the next lowest whole number if not otherwise a whole number Excess hours not counted Seasonal workers are excluded if they work 120 days or less during the year.
Full-Time Equivalent Employees (continued) Sole proprietor, a partner in a partnership, a shareholder owning more than 2% of an S corporation and any owner of more than 5% of other businesses are excluded from all calculations (FTEs, wages, & premium expenses). Family members of such owners/partners who also work for the business must be excluded from all calculations (FTEs, wages, & premium expenses). For employees not compensated on an hourly basis, regulations, rules, and guidance may be forthcoming from the Secretary of Health & Human Services and the Secretary of Labor.
Quick & Easy Example - FTEs ABC Company has a total of 12 employees 8 full-time employees (paid 2,080 hours each) 4 part-time employees (paid 1,040 hours each) 8 x 2,080 = 16,640 4 x 1,040 = 4,160 16,640 + 4,160 = 20,800 20,800 / 2,080 = 10 FTEs
Average Annual Wages Wages means wages as defined for FICA purposes. Calculated by dividing the aggregate amount of wages which were paid by the employer to employees during the taxable year by the number of full-time equivalent employees of the employer for the taxable year. Rounded to the next lowest multiple of $1,000 if not otherwise such a multiple. Seasonal workers are excluded if they work 120 days or less during the year.
Average Annual Wages (continued) Sole proprietor, a partner in a partnership, a shareholder owning more than 2% of an S corporation and any owner of more than 5% of other businesses are excluded from all calculations (FTEs, wages, & premium expenses). Family members of such owners/partners who also work for the business must be excluded from all calculations (FTEs, wages, & premium expenses). For employees not compensated on an hourly basis, regulations, rules, and guidance may be forthcoming from the Secretary of Health & Human Services and the Secretary of Labor.
Quick & Easy Example Average Wages ABC Company - 12 employees paid a total of $250,000 8 full-time employees 4 part-time employees 10 FTEs (from previous calculation) $250,000 / 10 FTEs = $25,000 in average wages
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Both viable examples will be available on the web We will go over one based on audience choice from poll results Comprehensive Example #1 LMNOP Company: 18 Employees 12 are FT 6 are PT 1 owner Comprehensive Example #2 XYZ Company: 31 Employees 11 are FT 20 are PT 2 owners
Amount of Credit Maximum Amount. The credit is worth up to 35% (25% for tax-exempt employers) of a small business' health insurance premium costs in 2010. On Jan. 1, 2014, this rate increases to 50% (35% for tax-exempt employers). Phase-out. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers. Tax Offset. As a tax credit, it cannot be claimed if the employer does not have income tax liability (except for taxexempt employers). Limited to the amount of income tax liability Unused credit can be carried back 1 year and carried forward 20 years (except 2010 can only be carried forward).
Calculating the Credit Only premiums paid by the employer that meet requirements of a qualifying arrangement count in calculating the credit. Any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer
Calculating the Credit (continued) The credit amount is limited or capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the State (or an area in the State) in which the employer offers coverage were substituted for the actual premium. The average premium for the small group market in a State (or area within a State) will be determined by the Secretary of Health and Human Services and published by the IRS (as of 4/19, this is expected by the end of April).
Calculating the Credit (continued) For tax years beginning in 2010 through 2013 (for employers that are not tax-exempt), the maximum credit is 35% of the employer s premium expenses that count towards the credit. For tax years beginning in 2010 through 2013 (for taxexempt employers), the maximum credit is 25% of the employer s premium expenses that count towards the credit.
Calculating the Credit (continued) Credit can be reduced based on the number of FTEs: Such amount multiplied by a fraction the numerator of which is the total number of full-time equivalent employees of the employer in excess of 10 and the denominator of which is 15. Credit can be reduced based on the average wages: Such amount multiplied by a fraction the numerator of which is the average annual wages of the employer in excess of the dollar amount in effect under subsection (d)(3)(b) and the denominator of which is such dollar amount.
Quick & Easy Example Tax Credit ABC Company Paid $64,000 in Medical Insurance Premiums on behalf of their employees 8 full-time employees 4 part-time employees 10 FTEs (from previous calculation) $25,000 in average wages (from previous calculation) $64,000 x 35% = $22,400 Income Tax Credit Because they are at 10 or less FTEs and at $25,000 or less in Average Wages, they are entitled to the full credit of $22,400
A Comprehensive Example #1 LMNOP Company has 18 employees. 12 are full-time and 6 are part-time. 1 of the 12 full-time is the owner, is exempt from OT and was paid for 2,080 hours. Of the remaining 11 full-time employees, 8 are exempt and were paid a combined 16,640 hours. The remaining 3 full-time employees are non-exempt and were paid 6,840 hours which included 600 hours of OT. The 6 parttime employees were paid a total of 6,240 hours. Total Hours Paid = 31,800. The number of hours to be used in calculation of FTEs = 31,800 2,080 600 = 29,120 Number of FTEs = 29,120 / 2,080 = 14 FTEs
A Comprehensive Example #1 (continued) LMNOP Company s total payroll of $472,385 was comprised of the following: 1 Owner was paid a total of $80,000 8 exempt staff paid $256,000 3 non-exempt staff were paid $82,385 which included $10,385 in OT 6 part-time staff were paid $54,000 The eligible wages for credit purposes is equal to $472,385 - $80,000 - $10,385 = $382,000 Therefore, average wages for purposes of the credit = $382,000 / 14 FTEs = $27,286 or $27,000 (rounded down)
A Comprehensive Example #1 (continued) LMNOP Company pays 75% of the single and family premiums for employees working 30 hours or more per week (12 employees). This represents a total of $98,100 in employer-paid premium which includes $4,500 paid on behalf of the 1 owner. For purposes of the credit, the amount of premium expense eligible for the credit is: $98,100 - $4,500 = $93,600 $93,600 x 35% = $32,760 (before potential phase-out )
I Hope This Hasn t Happened To Anyone Yet
A Comprehensive Example #1 (continued) LMNOP Company qualifies for a potential credit of $32,760 The credit can be reduced based on the excess number of FTEs over 10 divided by 15. 14 10 = 4 4 / 15 = 26.7% or a 26% reduction of the credit $32,760 x 26% = $8,517 reduction in credit (rounded down) The credit can be reduced based on the excess wages exceeding $25,000 divided by $25,000. $27,000 - $25,000 = $2,000 $2,000 / $25,000 = 8.0% or a 8% reduction of the credit $32,760 x 8% = $2,620 reduction in credit (rounded down)
A Comprehensive Example #1 (continued) LMNOP Company qualifies for a potential credit of $32,760 The credit is reduced based on the excess number of FTEs over 10 (divided by 15) by $8,517. The credit is further reduced based on the excess wages exceeding $25,000 (and divided by $25,000) by $2,620. The credit reductions cannot reduce the credit below zero. The final credit calculation can be summarized as: $32,760 - $8,517 - $2,620 = $21,623
A Comprehensive Example #1 (continued) Other potential factors not included in this example: Seasonal workers (assumed none) Average premium for Wisconsin Small Group Market as determined by the Secretary of HHS (assumed employer s cost to be lower) Employees who are family members of the owner (assumed none) Amount of employer s income tax liability
A Comprehensive Example #2 XYZ Company has 31 employees. 11 are full-time and 20 are part-time. 2 of the 11 full-time are partner-owners, are exempt from OT and were paid a combined 4,160 hours. Of the remaining 9 full-time employees, 6 are exempt and were paid a combined 12,480 hours. The remaining 3 full-time employees are nonexempt and were paid 6,840 hours which included 600 hours of OT. The 20 part-time employees were paid a total of 26,000 hours. Total Hours Paid = 49,480. The number of hours to be used in calculation of FTEs = 49,480-4,160 600 = 44,720 Number of FTEs = 44,720 / 2,080 = 21.5 or 21 FTEs
A Comprehensive Example #2 (continued) XYZ Company s total payroll of $1,300,080 was comprised of the following: 2 Partners were paid a total of $300,000 6 exempt staff paid $375,000 3 non-exempt staff were paid $157,080 which included $19,800 in OT 20 part-time staff were paid $468,000 The eligible wages for credit purposes is equal to $1,300,080 - $300,000 - $19,800 = $980,280 Therefore, average wages for purposes of the credit = $980,280 / 21 = $46,680 or $46,000 (rounded down)
A Comprehensive Example #2 (continued) XYZ Company pays 75% of the single and family premiums for employees working 30 hours or more per week (11 employees). This represents a total of $93,600 in employer-paid premium which includes $15,300 paid on behalf of the 2 partner-owners. For purposes of the credit, the amount of premium expense eligible for the credit is: $93,600 - $15,300 = $78,300 $78,300 x 35% = $27,405 (before potential phase-out )
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A Comprehensive Example #2 (continued) XYZ Company qualifies for a potential credit of $27,405 The credit can be reduced based on the excess number of FTEs over 10 divided by 15. 21 10 = 11 11 / 15 = 73.3% or a 73% reduction of the credit $27,405 x 73% = $20,005 reduction in credit (rounded down) The credit can be reduced based on the excess wages exceeding $25,000 divided by $25,000. $46,000 - $25,000 = $21,000 $21,000 / $25,000 = 84.0% or a 84% reduction of the credit $27,405 x 84% = $23,020 reduction in credit
A Comprehensive Example #2 (continued) XYZ Company qualifies for a potential credit of $27,405 The credit is reduced based on the excess number of FTEs over 10 divided by 15 by $20,005. The credit is further reduced based on the excess wages exceeding $25,000 (and divided by $25,000) by $23,020. The credit reductions cannot reduce the credit below zero. The final credit calculation can be summarized as: $27,405 - $20,005 - $23,020 = $0
A Comprehensive Example #2 (continued) Other potential factors not included in this example: Seasonal workers (assumed none) Average premium for Wisconsin Small Group Market as determined by the Secretary of HHS (assumed employer s cost to be lower) Employees who are family members of the owner (assumed none) Amount of employer s income tax liability
Special Considerations for Tax-Exempt Employers Credit is 25%, not 35% Credit (before any reduction) is the lesser of the calculated eligible credit (the 25% of eligible premium expenses) or the amount of income tax and Medicare tax withheld on employee wages plus the employer s share of the Medicare tax. IRS is expected to provide further information on how tax-exempt employers should claim the credit.
What Should You Take Away From This Webinar at a Minimum?
How Do I Know If My Firm Qualifies?
Then... You may be able to claim the Small Business Health Care Tax Credit. You would do so for the 2010 tax year when you file your tax forms in 2011.
What s Ahead? Confusion will be a constant for months and years to come. Example: Discrepancies between the text of HR 3590 Patient Protection and Affordable Care Act (Section 1421 and the IRS Guidance) Another constant will be the increase in the underlying cost of medical services...the cost issue hasn t changed; only how we pay for it. Compliance with qualifying levels of benefits could provide some latitude in design.
Questions?
Closing Comments Visit our blog after the presentation to download a PDF of the PowerPoint file and other elements from this webinar: http://myknowledgecenter.com/businessinsurance/tax-credit-webinar/ Contact a knowledge broker: 800-566-7007
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