Providing health insurance benefits can help small eCommerce businesses attract and retain top talent. But, health insurance premiums can also take a huge chunk out of your bottom line. Simply put, health insurance in the United States costs a lot of money. Fortunately, the IRS recognizes this reality and offers small businesses some tax relief via Form 8941.
IRS Form 8941, Credit for Small Employer Health Insurance Premiums does just what its name suggests. It provides a tax credit to qualifying small businesses that pay employee health insurance premiums. This credit can save small eCommerce employers thousands of dollars (or more) in federal taxes. As such, we’ll use this article to explain how Form 8941 works.
What is Form 8941?
Form 8941, officially named the Credit for Small Employer Health Insurance Premiums, provides tax relief to eligible small businesses. In particular, it provides a credit for certain employers who pay health insurance premiums on behalf of their employees. The IRS bases this credit on a percentage of the total premiums paid by the small business.
For most qualifying employers, the maximum credit totals out at 50% of premiums paid. And taxpayers can apply this credit against both regular and alternative minimum taxes. For example, a business that pays $20,000 in qualifying premiums could reduce its tax bill by $10,000. However, the IRS caps the credit at 35% for tax-exempt employers.
To qualify for the Form 8941 credit, employers must meet specific criteria relating to
- The type of health insurance provided
- The number of employees
- The average annual wages for those employees.
If your business qualifies, Form 8941 offers several key benefits.
The credit directly saves employers money they would otherwise spend on taxes. This cash can instead be poured back into operations. Form 8941 also indirectly incentivizes small businesses to provide health insurance coverage for their employees. Many small eCommerce employers couldn’t normally afford to provide this benefit. But, with the tax savings provided by Form 8941, providing health insurance becomes a more affordable option.
This health insurance benefit can also make a huge difference in attracting and retaining top talent. When individuals look for jobs in the eCommerce realm (or any industry), they more frequently look for total compensation. As such, salary only makes up one part of the equation. Employer-provided health insurance can make the difference between accepting or rejecting a job offer, especially for job seekers with families.
Who Qualifies for Form 8941?
The IRS outlines three requirements that employers must meet to qualify for the Form 8941 credit. We’ve gone into detail explaining these criteria, but the requirements can be extremely confusing. If unsure whether or not you qualify, please contact us to discuss your situation.
The employer-paid premiums for employee health insurance coverage under a qualifying arrangement.
Generally speaking, a qualifying arrangement requires employers to pay a uniform percentage (no less than 50%) of the premium cost for each enrolled employee’s health insurance coverage. And, as a further requirement, the health plan must be offered through a Small Business Health Options Program (SHOP) Marketplace.
The IRS does offer two exceptions to the above qualifying arrangement terms. First, some arrangements require employers to pay a uniform premium for each enrolled employee (composite billing) and offer different tiers of coverage, such as employee-only, dependent, and family coverage. This can be a qualifying arrangement even if it requires the employer to pay a uniform percentage that is less than 50% of the premium cost for employees not enrolled in employee-only coverage.
Second, other arrangements require employers to pay a separate premium for each employee based on age or other factors (list billing). This system can be a qualifying arrangement, even if it requires paying a uniform percentage that is less than 50% of the premium cost for some employees.
The employer had fewer than 25 full-time equivalent employees (FTEs) for the tax year.
Equivalent serves as the key term in this requirement. Small eCommerce businesses may be able to meet this requirement even if they had 25 or more employees. For instance, an employer with 48 employees that are each half-time has 24 FTEs and can claim the credit.
The employer paid average annual wages for the tax year of less than $56,000 per FTE.
Of note, the Form 8941 credit actually begins phasing out at average annual wages of $27,000. If a small business paid annual wages exceeding $56,000, the credit is completely eliminated. The IRS provides detailed instructions on how to calculate average wages for each FTE. Small eCommerce businesses can then use these average wages to determine their allowable Form 8941 credit.
Unfortunately, the IRS imposes a limit on the number of times eligible small businesses can use the Form 8941 credit. For tax years beginning after 2013, the credit period during which the credit can be claimed is a two-consecutive-tax-year period beginning with the first tax year in which:
- An eligible small employer files an income tax return with an attached Form 8941 with line A checked “Yes” and a positive amount on line 12, or
- A tax-exempt eligible small employer files Form 990-T with an attached Form 8941 with line A checked “Yes” and a positive amount on line 12.
Do I Need Form 8941 for My Business?
To answer this question, businesses first need to determine whether or not they meet the above qualification criteria. If so, you should absolutely submit Form 8941. This credit serves as a dollar-for-dollar reduction in a business’s tax bill. If you already provide health insurance benefits, you should receive the associated tax relief, as well. Employers can use these savings to fund operations, provide other employee benefits, or offset future taxes.
Additionally, small businesses that do not currently qualify should still consider Form 8941. For instance, small businesses may meet the FTE and average annual wage requirements, but they don’t provide health insurance. Without an available credit, these employers may struggle to financially justify providing this benefit.
But, if an employer sees an opportunity to provide an outstanding employee benefit, and reduce its tax bill, that’s a win-win. Bottom line, Form 8941 should both provide tax relief and incentivize small businesses to provide health insurance benefits.
How Do I Apply for Form 8941?
How a business applies for the Form 8941 credit depends on its structure. Partnerships, S corporations, cooperatives, estates, trusts, and tax-exempt eligible small employers must file Form 8941 with their returns to claim the credit.
Conversely, all other taxpayers must not complete or file this form if their only source for this credit is a partnership, S corporation, cooperative, estate, or trust. Instead, these taxpayers must report this credit directly online 4h in Part III of Form 3800, General Business Credit.
All of these requirements and conditions can make claiming Form 8941 benefits challenging for small business owners. As a result, we highly recommend working with a tax professional to claim this tax credit. If you provide health insurance to employees and qualify for Form 8941, you don’t want to lose out on tax relief due to a filing error. Working with a professional will ensure you receive the maximum possible benefit.
Form 8941 provides an incredible tax benefit to qualifying small eCommerce businesses. It allows businesses to reduce tax bills by up to 50% of health insurance premiums paid for employees. In addition to saving money, this tax credit also relates directly to an outstanding recruitment and retention tool. When talented individuals consider otherwise similar eCommerce jobs, most will choose the one that offers health insurance benefits.
We understand that eCommerce businesses struggle with providing health insurance benefits to employees. It can seem like an impossible task. Form 8941 can help offset these costs, and completing it shouldn’t be a daunting task for eCommerce professionals.
At Tax Hack, we live and breathe taxes for small eCommerce businesses, so contact us to set up a tax planning strategy session!