We all know that health insurance is a big expense. If you have employees in your real estate business, you’re probably finding it a struggle to provide them with good health coverage, or any coverage at all. However, if you do provide or want to provide employee health insurance, the federal government is prepared to help you in a big way.
The massive health insurance reform enacted by Congress in 2010 created a brand-new tax credit for small employers who pay for health insurance for their employees. From 2010 through 2013, employers who qualify can claim a tax credit of up to 35 percent of their contributions to their employees’ health insurance premiums, subject to certain limits. The percentage increases to 50 percent for 2014 and 2015. The credit ends in 2016.
Obviously, if you qualify for the credit, you can save substantial taxes. Unfortunately, to date only about 14 percent of the 4.4 million employers eligible for the credit have applied for it. This may be because they don’t know about it, think they can’t qualify, or find it too complicated. These employers are losing out on millions of dollars in tax savings. Don’t be one of them!
Of course, you can deduct health insurance costs for employees — including your spouse — as a business expense. Tax deductions are all well and good, but there is something even better: tax credits. Unlike a deduction, a tax credit is a dollar-for-dollar reduction in the taxes you owe the Internal Revenue Service. In other words, a $1,000 credit saves you $1,000 on your taxes. How much a $1,000 deduction saves you depends on your top tax bracket.
To qualify for the health insurance credit, you must satisfy the following three requirements:
1. You must have employees
You can qualify for the health insurance credit only if your business has non-owner employees who are not your relatives. You can forget about getting the credit if you’re running a one-person operation. The credit is designed for smaller businesses. The full credit is available only to businesses with 10 or fewer full-time employees. It is gradually phased out if you have more than 10 full-time employees. Your employees can be full-time or part-time workers.
Because the eligibility formula is based on the number of full-time employees, not the number of employees, employers that have more than 25 individual workers may qualify if some of their workers are part-time.
As is the case with the business tax deduction for health expenses, business owners don’t count as employees for these purposes and don’t qualify for the tax credit. This includes sole proprietors, partners in partnerships, shareholders owning more than 2 percent of an S corporation, and any owner of more than 5 percent of the business. In addition, family members don’t count as employees — this includes children and spouses.
2. Employee compensation must average less than $50,000
The tax credit is intended to help employers pay for health insurance for employees with relatively low salaries. To qualify for the credit, the average annual wages of your employees for the year must be less than $50,000 per full-time employee. The credit is reduced by 4 percent for each $1,000 that the person’s average annual compensation exceeds $25,000. Thus, the credit is completely phased out if your employees are paid $50,000 or more in annual wages.
3. You must pay at least half of employee health insurance premiums
Finally, you must pay at least 50 percent of the annual premiums for your employees’ health insurance. Health insurance for purposes of the credit can take a variety of forms. It’s up to the employer to decide what type of coverage to provide. You can pay for the insurance directly or reimburse your employees for their payments. The coverage can be under any hospital or medical service policy, or a health maintenance organization (HMO) contract offered by a health insurance company.
Only the health insurance premiums paid by the employer are counted in calculating the credit. If an employer pays only a portion of the premiums (with employees paying the rest), only that portion is counted. For example, if an employer pays 80 percent of the premiums for employees’ coverage, only that 80 percent is counted in calculating the credit.
Many real estate professionals easily qualify for the health insurance credit. It’s important to understand that when you take the health credit, your tax deduction for employee health insurance expenditures is reduced by the amount of the credit.
If you think you qualified for the credit last year, but failed to file for it, you can amend your tax return to do so. If you qualify for it this year, be sure to apply for it on your tax return. The IRS website has expensive information on this tax credit at irs.gov.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.
