Employees Don't Get It
Sadly, most employees don’t understand what it truly costs to employ them, and even the Obamacare tax credits for the small business owners impose some restrictions. To receive the tax credit, you must employ 25 employees or less, have average annual wages of $50,000 or less and must contribute at least 50 percent of the healthcare premium costs. This is not a tax credit folks, this is a fairy tale.
Why do I compare these healthcare tax credits to fairy tales? I have owned and operated many small businesses—all with 25 employees or less. I can see where I would qualify for meeting the 50 percent employer contribution in premiums, (although health care is SO expensive and before my businesses were shut down, I was offering only a 40 percent employer contribution), but I wouldn’t have qualified when it came to the average wages of $50,000 or less—this means your annual payroll divided by the number of employees you have. So it’s a fairy tale to some business owners and I for one did not receive the little IRS post card telling me any of my businesses would qualify for this credit for wages paid in 2010. My average payroll was not $50,000 or less and unless you’re very, very small, most business owners won’t meet this requirement.
To show you how I wouldn't qualify, in 2010 for one of my businesses the total wages I paid out were $512,748 and I had 10 employees ($512,784 / 12 employees = $51,275 so my average payroll was over $50,000. Some may say, heck you paid your employees well, but in the auto industry it's the nature of the beast and those who have worked in and around the industry know flat time hours for mechanics can add up quickly.
On the other hand, say you did pay out annual wages of $250,000 and had 10 employees - this would make you eligible because your average payroll would be: $250,000 / 10 employees or $25,000. Here, I must point the latest poverty wages for a family of four is $22,350 so if a family is depending on a one-income household making $25,000, shame on the employer because that's only $2,650 above the poverty level. Don't forget these are gross wages, not net wages after required tax and other deductions.
Then there are the forms from the IRS. Yes fellow entrepreneurs, the IRS wants us to fill out more forms on top of the ones we already have to fill out—which are multiple and lengthy. This new tax credit form (if you even qualify) is Form 8941 (a link to the form can be found in the reference section below).
I would be remiss if I didn’t mention how much of a tax credit one could receive in Sleeping Beauty Land. Well, first you must fill out a fact sheet – another IRS form (seen in screenshot below). I should mention that if you do employ some part-time workers, you can add their total hours up as well on the worksheet/fact sheet.
If you do qualify, the screenshot below shows how the credit works:
An employer (if he qualified) was offered a 35 percent tax credit in 2010 and in year 2014,the tax credit will be 50 percent (if Obamacare holds up and isn’t voted out). Note in the screenshot part-timers and those tax credits are “phased out." Pay attention to the fine print in the screenshots above as well, especially the first one. It does say once you calculate your average payroll you "may be able to claim" the tax credit. "May" does not mean "can" or "will" here folks.
Don’t fret, however, because if you are as confused as most, you can read the IRS publications IR-2011-90 or IR-2010-117 (again links to both provided below). Actually, to take the mystery out of the credit, just call the IRS and ask them to explain it to you and offer the official IRS representative your scenario—because their scenarios are usually not the average business.
Additionally, a tax credit doesn’t put money in a business owner's bank account so it doesn’t mean they’ll be getting cash to help pay for healthcare or other benefit premiums. A tax credit is filed with the company’s tax return and, sure, it’s a great credit. Most business owners, however, will tell you they don’t have the cash to begin with to pay for benefits and a tax credit does nothing but add a deductible expense on the annual tax return—so the government is not “handing out money" to help pay for Obamacare. Nor should a small business owner expect an official IRS check in the mail to help pay for benefits.