The IRS has issued a draft version of the 2022 Form 8941 (Credit for Small Employer Health Insurance Premiums). The draft 2022 instructions have not yet been released. Form 8941 is used by small businesses and tax-exempt organizations to calculate the small business health care tax credit when they file their 2022 income tax returns.

Background knowledge

The form was added by the 2010 Patient Protection and Affordable Care Act, which provides a sliding scale income tax credit to small employers with fewer than 25 employees. To qualify for the credit, an employer must pay at least 50% of the cost of health care coverage for its workers at the premium rate for an employee who has single coverage (as opposed to family coverage). Because the eligibility formula is based in part on the number of full-time equivalent employees (FTEs), not the number of employees, many businesses will qualify for the credit even if they employ more than 25 individual workers. In addition, the credit is applied against an employer’s income tax liability, rather than its employment tax liability. An employer may not reduce employment tax payments (i.e., withheld income tax, Social Security tax, and Medicare tax) during the year in anticipation of the credit.

The credit is computed on IRS Form 8941. Both small businesses and tax-exempt organizations will use the form to calculate the credit. Afterwards, small business will then include the amount of the credit as part of the general business credit on its income tax return.

Draft changes

One of the three requirements for a small employer to be eligible for the tax credit is the average annual wage paid per FTE. The draft notes that for 2022, the average annual wage paid per FTE must be less than $58,000 (increased from $56,000 in 2021). Line 3 of Form 8941 is where an eligible small employer should enter the average annual wages paid for the tax year (from Worksheet 3, line 3), which must be a multiple of $1,000.  

The draft also notes that if an eligible small employer had more than 10 FTEs and average annual wages of more than $27,000, the FTE and average annual wage limitations will separately reduce the employer’s credit. This may reduce the employer’s credit to zero even if the employer had fewer than 25 FTEs and average annual wages of less than $58,000.

Source: Thomson Reuters

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