Existing state tax credit complements new federal credit

Many Kansas small businesses get two incentives to offer health insurance

0 | Health Reform, Insurance

In addition to the federal tax credit that eligible small businesses can claim starting this year, there’s an existing state tax credit that qualifying businesses can tap.

And the two credits are not necessarily mutually exclusive.

Businesses may qualify for the state credit if they employ between two and 50 people and have not contributed to health insurance premiums or health savings account for their employees in the preceding two years.

Unlike the federal tax credit, there is no average salary cap to qualify.

The credit can be worth $70 per month per employee for the first year, $50 for the second year and $35 for the third and final year of eligibility.

So for example, a company that pays $668 per month toward the premium costs for four employees (as Kansas business Bistro Kids did in 2010) could be credited $280 per month on their state tax return.

Then, to calculate the federal tax credit, the small business would subtract the state credit from actual premiums paid, leaving a monthly net premium cost for the firm of $388.

If a firm’s employees average under $25,000 in annual salary, the company is eligible this year for the maximum federal credit of 35 percent. (Average salaries above that amount decrease the tax credit.)

Using the same example: If the firm draws on both the federal and state tax credits, it could be credited $415 per month of premiums paid, or 62 percent of the cost of insuring the four employees who opted for coverage.

Note: The example was figured by KHI News Service, not an accountant. For full details on how the state tax credits potentially affect the federal credit see Item No. 14 on this IRS.gov FAQ.