What if I told you, your painting business could improve employee loyalty and save thousands of dollars on taxes with one action? Sounds like a crazy idea, right? Well, I’m here to tell you it is possible by claiming the Small Employer Health Insurance Tax Credit.
Why The Small Employer Health Insurance Tax Credit?
As you might already know, the penalty for not having health insurance goes up again in 2016 to the higher of 2.5% of household income or $695 per adult ($347.50 per child) with a capped maximum penalty of $2,085. As a painting business owner, you can help your employees avoid this penalty while simultaneously saving big on your taxes by starting a health insurance program and claiming the Small Employer Health Insurance Tax Credit. The Small Employer Health Insurance Tax Credit allows employers to claim up to 50% of the cost of insurance premiums paid as a tax credit.
Eligibility for Health Insurance Tax Credit
First off, determine your eligibility for the Small Employer Health Insurance Tax Credit. In order for your painting business to be eligible for the tax credit your business must:
- Pay an average wage less than $52,000
- Have fewer than 25 full-time employees
- Pay at least half of employee health insurance premiums
- Purchase the health care coverage through the SHOP marketplace on healthcare.gov.
- Ensure 70% of employees have healthcare coverage already or sign up for coverage under your plan
Your business can save thousands on this tax credit while providing much-needed value to your employees.
Example Situation for Health Insurance Tax Credit
To illustrate the potential tax savings, let’s look at an example.
ABC painting has 10 employees who make an average of $25,000 a year. Tom, the owner of ABC painting, decides to start a health insurance program and offers the program to his employees. After offering the health care coverage, Tom determines that 4 employees are already covered and 6 employees are interested in coverage. So Tom provides those 6 employees with Silver plans with an annual price of $3,780 per employee.
ABC painting pays half of the health care premium and the employee pays the other half. This results in a $11,340 cost to ABC painting (6 x $3,780 = $22,680; $22,680 / 2 = $11,340). At the end of the tax year, ABC painting fills out Tax Form 8941 Small Employer Health Insurance Tax Credit. ABC painting claims the tax credit, and reduces their tax liability dollar-for-dollar by $5,670 ($11,340 x 50%). So the actual cost of ABC painting’s health insurance program for the 6 employees is $5,670 ($11,340 - $5,670).
Notes to Consider
One item to note is the IRS does phase out the tax credit when businesses have 10 and 25 employees and have average employee salaries between $25,000 and $50,000. If you would like to see how much of a tax credit your business would potentially qualify, use this calculator.
According to a recent study, only 17% of eligible small businesses claim this tax credit. This is unfortunate since it saves small business owners thousands of dollars. In addition, starting a health insurance program will build loyalty with employees and attract new employees as well.
If you are interested in learning more money-saving tax tips for your painting business, get this free report for painting contractors.