Good Business Sense: The Small Business Tax Credit in the Affordable Care Act
A report from Families USA and Small Business Majority, May 2012
Note: This report contains data for all states and the District of Columbia.

Introduction

Across America, small businesses are the cornerstone of state and local economies. They employ millions of workers; create more than half of our private, non-farm gross domestic product; drive innovation; and contribute to our communities in large cities, suburban settings, and rural towns. Despite these strengths, small businesses often operate with thin profit margins and, partly as a result, are less likely than big business to be able to offer health coverage to their workers.

To address this problem, Congress included in the Affordable Care Act a significant new tax credit for small business owners who provide their workers with health insurance. Under this new tax credit, businesses that have fewer than 25 full-time workers and average wages of less than $50,000 are now eligible to receive a tax credit of up to 35 percent of the cost of the health insurance that they provide for their workers. To qualify for the tax credit, small businesses must cover at least 50 percent of each employee’s health insurance premiums. In 2014, the size of the credit will increase to cover up to 50 percent of the cost of health insurance provided to workers. (For more details on how the tax credit works, see page 11.)

To understand the reach of this new small business health care tax credit, Families USA and Small Business Majority commissioned The Lewin Group to develop estimates of the number of small businesses that are eligible for this new tax break in tax year 2011 and how many workers could potentially benefit as a result. The Lewin Group used their widely respected Health Benefits Simulation Model for these estimates.

Our analysis found that more than 3.2 million small businesses, employing 19.3 million workers across the nation, will be eligible for this tax credit when they file their 2011 taxes. In total, these small businesses are eligible for more than $15.4 billion in credits for the 2011 tax year alone, an average of $800 per employee.

While the potential reach of this new tax credit is great, educating the small business community about it remains a challenge. As with other new programs, awareness of the new tax credit will grow over time, but the federal government must still partner with the small business community to conduct outreach to eligible small business owners. Unfortunately, the current heated political debate about the Affordable Care Act has created additional barriers to effectively reaching America’s small business owners with the facts about this new tax credit.