The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
New Tax Credit for Health Insurance Premiums Paid by Farmers
Apr 27, 2010
Although I am usually on the other side from the IRS, I will admit that their web-site is one of the best sites I have used for accessing tax information. The recent Health Care Reform law enacted a new employer credit for certain employers who pay for their employee's health care premiums. I would estimate that 90% or more of the farmers will qualify for this credit if they pay their employees premiums.
To be eligible, you must be a small employer as follows:
- You employ on average less than 25 full-time equivalent employees during the year. The way to calculate this is to take your total paid employee hours (but subtract any hours for employees that work more than 2,080 hours in the year) and then divide by 2,080 (number of hours in a 52 week / 40 hour per week). If the number is less than 25, you qualify, if more than 25, you do not qualify.
- The average wage paid to your employees is less than $50,000 per year. Again, you will most likely have to do this calculations using the FTE examples.
- The employer must pay the health insurance premiums under a "qualifying arrangement".
A qualifying arrangement" is where the employer pays at least 50% of the employees health insurance (assuming a single employee). The amount of the premium that is eligible for the credit is based upon the actual premium paid by the employer. This amount is also subject to a cap based upon what the employer's premiums would have been for the small group market for their state (or states). Also, if the employer pays 80% of the premium, then this cap is based upon 80% also.
The maximum credit for years 2010 to 2013 is 35%.
Let's take an example for 2010. If the farmer employs 10 employees and pays and average wage of $24,000 and pays $45,000 in health insurance premiums for the year and this amount is more than 50% of the total health insurance premiums, the credit would be 35% of $45,000 or $15,750.
This credit is reduced if you employ more than 10 FTE or your average annual wage is more than $25,000.
In determining your FTE for the year, you do not include any seasonal employees which is based upon working less than 120 days during the year.
You do not include yourself or any of your family in arriving at determining FTE, however, you also do not get the credit for any of these premiums paid.
This credit is treated as a general business credit which means you have to have income tax to offset the credit. If the credit is not used completely, the amount not used can be carried back one year and forward 20 years.
Another negative to the credit is that you must reduce your health insurance deduction by the amount of the credit.
For 2010, all employee health insurance premiums paid qualify for the credit (even though paid before the law was enacted).
In my opinion, a farmer who has more than $200,000 in taxable income will generally take advantage of the credit since they will normally be able to offset the credit against their income tax. For those farmers with taxable income between $100,000 and $200,000, the credit will probably be better than the deduction, but certainly not in all cases. For farmers under $100,000 of taxable income, in many cases taking a full deduction will be better than the credit since it will reduce self-employment income and in most cases, the farmer will not have enough regular income tax to offset the credit.
You will need to review this each year to determine which method works best for you.
The IRS has a more detailed question and answer memo on the credit.