If you're a small business owner, you're probably still grappling with the Affordable Care Act and the best way to provide health insurance to your employees. And the tax implications of the various choices will only make the decision that much more confounding. But now that tax time is here, it's worth taking a look forward at what the law, commonly referred to as Obamacare, will mean for your company's tax picture.
First, let's get a key number out of the way. If you have fewer than 50 full-time employees, you are exempt from the law, meaning you don't have to provide health insurance. Keep in mind that the 50 includes "full-time equivalents," or part-time employees whose hours worked are added together in a formula the Internal Revenue Service uses to determine a company's tax status. There may be tax benefits to offering insurance, which we'll get to in a minute, but if you're under that 50-employee mark, you have no legal obligation to do so.
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That said, if you have fewer than 25 employees, you might get a tax break for offering health insurance. Specifically, if the average annual wages you pay are less than $50,000 and you contribute at least 50 percent to health-plan premiums, you can get a tax credit of up to 35 percent of your premium costs through 2013. If you buy a health plan on one of the new exchanges that start up next year, you'll get a tax credit of up to 50 percent of your premium contributions in 2014 and 2015.
But you shouldn't rush out and insure your employees without first figuring out if the tax credit will be worth very much to your company, says Bradford Hall, managing partner of Hall & Co., an accounting firm in Irvine, Calif. "If you have just 10 employees and they make $50,000 on average, you get zero," Hall says. "The only way you maximize that credit is if you have 10 employees or less making $25,000 or less in annual salaries. We're talking minimum wages." In other words, if your top three executives are making six-figures each, you may be out of luck, even if the rest of your employees are getting entry-level salaries.
Companies with more than 50 employees will face an entirely different set of tax challenges. If you choose not to offer a health plan, you'll pay a $2,000 per-employee fee to the IRS for all but 30 of your full-timers. If you offer a bare-bones plan that's deemed "unaffordable" under the law, you risk a $3,000 per-employee fee for any worker who buys a plan on the public exchange and receives a tax credit.
None of those penalties will be tax deductible--an important consideration for making the decision of whether or not to insure. "When you offer insurance, a portion of the premium you pay becomes a deductible expense on your taxes," says Ron Present, a principal at the accounting firm Brown Smith Wallace in St. Louis.
What's more, Present says, small-business owners may find that the advantages of offering insurance outweigh the financial burdens. For example, companies that rely on highly skilled workers may need to offer health insurance so they can prevent the most talented job candidates from fleeing to other companies. "Our philosophy is you have to look at this strategically, not just financially," Present says.
Owners of small companies should also consider how that 50-employee threshold might affect their growth strategies, says David Lewis, founder and president of Operations Inc., a Norwalk, Conn.-based human-resources outsourcing firm. Lewis's own company offers health insurance to its full-time employees, but only 10 people qualify because so much of the staff works part-time. Lewis says he has advised some of his clients who can't afford insurance to look at the feasibility of a part-time workforce. "A lot of companies are talking about moving to a structure like ours," Lewis says, "so they can dodge this 50-person limit."
Either way, Lewis adds, preparing for the financial realities of health reform--taxes and otherwise--is something all small businesses need to start thinking about now. "It is the biggest change in the human-resources spectrum since I started this company 12 years ago," he says. "It's going to have a huge impact."