Summary of Small Business Health Insurance Tax Credit Under PPACA (P.L. 111-148)

Chris L. Peterson
Specialist in Health Care Financing

Hinda Chaikind
Specialist in Health Care Financing

This report provides a description of the small business tax credit and illustrations of the phase-out for qualifying employers' contributions toward their workers' health insurance premiums, based on §1421 and §10105(e) of the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148). This credit is available to for-profit and nonprofit employers with fewer than 25 full-time equivalent employees with average annual wages of less than $50,000. 

Type of Credit 
Under PPACA, certain small employers will be eligible for a tax credit, provided they contribute a uniform percentage of at least 50% toward their employees' health insurance. For nonprofit (tax-exempt) organizations, the credit will be in the form of a reduction in income and Medicare tax the employer is required to withhold from employees' wages and the employer share of Medicare tax on employees' wages (with the credit thus limited by these amounts). For all other qualifying employers, it will be in the form of a general business credit. This type of credit is not refundable, but is limited by the for-profit employer's actual tax liability. In other words, if a forprofit company had a year in which it ended up paying no taxes (i.e., it had no taxable income, after accounting for all its other deductions and credits), then the small business tax credit could not be used for that year; there would be no income tax for this credit to reduce. However, as a general business credit, an unused credit amount can generally be carried forward up to 20 years. For for-profit employers, "the credit can be reflected in determining estimated tax payments for the year to which the credit applies in accordance with regular estimated tax rules."1 

Eligible Small Employers 
Full Credit 
In each of the four years 2010 through 2013, the full (or maximum) credit will cover up to 35% of a qualified for-profit employer's contributions2 to health insurance. For example, if an employer paid for 60% of premiums, the maximum small business tax credit through 2013 will be equivalent to 35% of the employer contribution (or 21% of the total premium in this example— i.e., 35% of 60%). In this case, assume the average total premium for this employer was $7,500, and the employer's contribution was $4,500 (60%) per FTE, the maximum tax credit would be $1,575 per FTE (35% of $4,500).3 For nonprofit employers, the maximum credit through 2013 is 25% (rather than 35%) of the employer's contribution.


Date of Report: April 5, 2010
Number of Pages: 5
Order Number: R41158
Price: $29.95

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