How is the Credit Reduced...

Q.  How is the credit reduced if the number of FTEs exceeds 10 or average annual wages exceed $25,000?

1. If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced as follows. If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the number of FTEs in excess of 10 and the denominator of which is 15. If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the amount by which average annual wages exceed $25,000 and the denominator of which is $25,000. In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the credit to which the employer is entitled. For an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the reduction is the sum of the amount of the two reductions. This sum may reduce the credit to zero for some employers with fewer than 25 FTEs and average annual wages of less than $50,000.

Example 5.

For the 2010 tax year, a qualified employer has 9 FTEs with average annual wages of $23,000 per FTE. The employer pays $72,000 in health care premiums for those employees, which does not exceed the average premium for the small group market in the employer's state, and otherwise meets the requirements for the credit. The credit for 2010 equals $25,200 (35% x $72,000).

Example 6.

For the 2010 tax year, a qualified tax-exempt employer has 10 FTEs with average annual wages of $21,000 per FTE. The employer pays $80,000 in health care premiums for those employees, which does not exceed the average premium for the small group market in the employer's state, and otherwise meets the requirements for the credit. The total amount of the employer's income tax and Medicare tax withholding plus the employer's share of the Medicare tax equals $30,000 in 2010.

The credit is calculated as follows:

1. Initial amount of credit determined before any reduction: (25% x $80,000) = $20,000
2. Employer's withholding and Medicare taxes: $30,000
3. Total 2010 tax credit is $20,000 (the lesser of $20,000 and $30,000).

Example 7.

For the 2010 tax year, a qualified employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in health care premiums for those employees ,which does not exceed the average premium for the small group market in the employer's state, and otherwise meets the requirements for the credit.

The credit is calculated as follows:

1. Initial amount of credit determined before any reduction: (35% x $96,000) = $33,600
2. Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480
3. Credit reduction for average annual wages in excess of $25,000: ($33,600 x $5,000/$25,000) = $6,720
4. Total credit reduction: ($4,480 + $6,720) = $11,200
5. Total 2010 tax credit: ($33,600 - $11,200) = $22,400.