How is the number of employees determined for eligibility?
Only employers with fewer than 25 FTEs are eligible for the tax credit; the full credit goes to employers with 10 or fewer full-time equivalent employees (FTEs).
Employers may choose to count hours in one of three different ways, to maximize the credit and minimize their bookkeeping burden. These include:
- Actual hours of service: Divide the total hours for which the employer pays wages to the employees during a taxable year by 2,080. No more than 2,080 hours (equivalent to a 40-hour work week) should be counted for any employee.
- Estimate hours based on total days of service
- Estimate hours based on total weeks of service
For the 2010 tax year, an employer pays 5 employees wages for 2,080 hours each, 3 employees wages for 1,040 hours each, and 1 employee wages for 2,300 hours.
The employer’s FTEs would be calculated as follows:
1) Total hours (not exceeding 2,080 per employee) is the sum of:
a. 10,400 hours for the 5 employees paid for 2,080 hours each (5 X 2,080)
b. 3,120 hours for the 3 employees paid for 1,040 hours each (3 X 1,040)
c. 2,080 hours for the 1 employee paid for 2,300 hours (hours limited to 2,080)
Total: 15,600 hours
2) FTEs: 7 (15,600 divided by 2,080) = 7.5, rounded down to the next-lowest whole number).
Can an employer with 25 or more employees qualify for the tax credit if some of its employees are part-time?
Yes. The limit on the number of employees applies only to FTEs. Full-time employees are those who work 30 hours or more; part-time employees work less than 30 hours per week, figured on a monthly basis. This takes weekly fluctuations into account.
Example. An employer with 46 half-time employees has 23 FTEs and may qualify for the credit.
Are seasonal workers counted in determining FTEs and average annual wages?
Generally, no. They are only counted for FTE equivalents and average annual wages if they work for the employer more than 120 days during the tax year.
Does the owner of a business count as an employee for purposes of the tax credit if s/he also provides services? Do family members of a business owner who work for the company count as employees?
An owner is not counted if s/he is a sole proprietor, a partner in a partnership, a shareholder owning more than 2% of an S corporation or an owner of more than 5% of other businesses.
Family members are not counted if they are children or grandchildren; siblings
or step-siblings; parents or grandparents; step-parents; nieces or nephews; aunts or uncles; sons- or daughters-in-law; fathers- or mothers-in-law; or brothers- or sisters-in-law.
This means their hours and wages do not apply to the FTE count, the amount of average annual wages or the amount of premium costs paid.
How are annual average wages determined?
Average annual wages are calculated by dividing total wages paid by the employer to employees during a taxable year (box 5 of W-2 wages) by the number of FTEs for the year. The result is rounded down to the nearest $1,000.
For the tax year 2010, an employer pays $224,000 in wages and has 10 FTEs.
The employer’s annual average wage would be: $22,000 ($224,000 divided by 10 = $22,400, rounded down to the nearest $1,000).
How is the tax credit calculated for employers with more than 10 FTEs and/or average annual wages over $25,000?
As long as the employer has fewer than 25 FTEs and pays annual average wages under $50,000 (and meets other specified requirements) they are eligible for a tax credit on a sliding scale basis. A standard formula is used to reduce the full tax credit.
If there are more than 10 FTEs: The reduction is determined by multiplying the full credit amount by a fraction: the numerator is the number of FTEs over 10 and the denominator is 15.
If average annual wages exceed $25,000: The reduction is determined by multiplying the full credit amount by a fraction: the numerator is the amount by which average annual wages exceed $25,000 and the denominator is $25,000.
The amount calculated using the formula above is then subtracted from the full tax credit to determine the final credit the employer qualifies for. If the employer has both more than 10 FTEs and average annual wages over $25,000, the credit is determined by adding both reduction amounts together and subtracting that sum from the full credit amount.
Example. Calculating the sliding-scale tax credit
For the 2010 tax year, a qualified employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in healthcare premiums for those employees (which does not exceed the benchmark premium) and otherwise meets the requirements for the credit. The credit is calculated as follows:
- Initial amount of credit determined before any reduction: (35% X $96,000) = $33,600
- Credit reduction for FTEs in excess of 10: ($33,600 X 2/15) = $4,480
- Credit reduction for average annual wages over $25,000: ($33,600 X $5,000/$25,000) = $6,720
- Total credit reduction: ($4,480 + $6,720) = $11,200
- Total 2010 tax credit: ($33,600 – $11,200) = $22,400.