Small Business Health Care Tax Credit Questions and Answers: Determining FTEs and Average Annual Wages
Q29. What is an FTE?
A29. A full-time equivalent employee (FTE). See the “How is the number of FTEs determined?” question for more information on how to calculate the number of FTEs.
Q30. Who is an employee for purposes of determining FTEs and average annual wages?
A30. In general, all employees of the eligible small employer are taken into account when determining FTEs and average annual FTE wages, including employees who terminated employment during the tax year, employees covered under a collective bargaining agreement, and employees who are not enrolled in health care coverage. The following individuals are not considered employees for purposes of the credit: owners of the small business, such as sole proprietors, partners, shareholders owning more than 2% of an S corporation or more than 5% of a C corporation; spouses of these owners; and family members of these owners, which include a child, grandchild, sibling or step-sibling, parent or ancestor of a parent, a step-parent, niece or nephew, aunt or uncle, son-in-law or daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law. A spouse of any of these family members should also not be counted as an employee.
Q31. Can I be counted as an employee if I own my small business?
A31. No. See “Who is an employee for purposes of determining FTEs and average wages” for information on who may be counted in the FTE and average annual wage calculation.
Q32. What about family members of the small business owner?
A32. Family members who work for the small employer are not counted as employees in calculating the credit. See “Who is an employee for purposes of determining FTEs and average wages” for information on who may be counted in the FTE and average annual wage calculation.
Q33. Do seasonal workers count in FTEs and average annual wages?
A33. Generally, no. Seasonal workers are workers who perform labor or services on a seasonal basis as defined by the Secretary of Labor, and retail workers employed exclusively during holiday seasons. For this purpose, employers may apply a reasonable, good faith interpretation of the term “seasonal worker.” Seasonal workers are not employees for purposes of the credit unless the seasonal worker provides services to the employer on more than 120 days during the taxable year; however, premiums paid on behalf of a seasonal worker are counted in determining the amount of the credit.
Q34. Do part-time employees count in FTEs and average annual wages?
A34. Yes, part-time employees are counted in FTEs and average annual wages. If an employee works part-time throughout most of the year, he or she is not a seasonal worker and the employer must count the employee’s hours of service during the year in its FTE and average annual wage calculation.
Q35. Are leased employees counted in FTEs and average annual wages?
A35. Yes, leased employees (as defined in section 414(n)) are counted in the FTE and average annual wage calculation. A leased employee is a person who is not an employee of the service recipient and who provides services to the service recipient pursuant to an agreement with the leasing organization.
Q36. Are ministers included in a church’s FTE calculation?
A36. The answer depends on whether, under the common law test for determining worker status, the minister is considered an employee of the church or self-employed. If the minister is an employee, the minister is taken into account in determining an employer’s FTEs, and premiums paid on behalf of the minister can be taken into account in computing the credit. If the minister is self-employed, the minister is not included in the employer’s FTE calculation and premiums paid on behalf of the minister are not taken into account.
Q37. Are ministers’ compensation taken into account in the average annual wage calculation?
A37. No. Compensation paid to a minister performing services in the exercise of his or her ministry is not subject to FICA tax and is not wages as defined in section 3121(a). It is not taken into account in the average annual wage calculation.
Q38. What are the permissible ways to count hours of service?
A38. An employee’s hours of service for a year include hours for which the employee is paid, or entitled to payment, for the performance of duties for the employer during the employer’s tax year. Hours of service also include hours for which the employee is paid for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Hours of service do not include the hours of seasonal employees who work for 120 or fewer days during the taxable year, nor do they include hours worked for a year in excess of 2,080 by a single employee.
There are three methods for calculating the total number of hours of service for a single employee for the taxable year: actual hours worked; days-worked equivalency; and weeks-worked equivalency. Employers do not need to use the same method for all employees and may apply different methods for different classifications of employees if the classifications are reasonable and consistently applied. For example, an employer may use the actual hours worked method for all hourly employees and the weeks-worked equivalency method for all salaried employees.
(1) Actual Hours Worked: An employer may determine actual hours of service from records of hours worked and hours for which payment is made or due, including hours for paid leave. For example, if payroll records indicate an employee worked 2,000 hours and was paid for an additional 80 hours on account of vacation, holiday and illness, the employee must be credited with 2,080 hours of service (2,000 hours worked + 80 hours for which payment was made or due).
(2) Days-Worked Equivalency: An employer may use a days-worked equivalency whereby the employee is credited with 8 hours of service for each day the employee would be required to be credited with at least one hour of service, including hours for paid leave. For example, if an employer uses the days-worked equivalency for an employee who works from 8:00a.m.–12:00p.m. every day for 200 days, the employee must be credited with 1,600 hours of service (8 hours for each day the employee would otherwise be credited with at least one hour of service x 200 days).
(3) Weeks-Worked Equivalency: An employer may use a weeks-worked equivalency whereby the employee is credited with 40 hours of service for each week for which payment is made or due including weeks of paid leave. For example, if an employee worked 49 weeks, took two weeks of vacation with pay, and took one week of leave without pay, the employee must be credited with 2,040 hours of service (51 weeks x 40 hours per week).
Q39. How is the number of FTEs determined?
A39. Add up the total hours of service for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee), and divide that amount by 2,080. If the result is not a whole number, round to the next lowest whole number. (If the result is less than one, however, round up to one FTE.) In some circumstances, an employer with 25 or more employees may qualify for the credit if some of its employees work less than full-time. For example, an employer with 48 employees that are each half-time has 24 FTEs and, therefore may qualify for the credit. See the “Who is an employee for purposes of determining FTEs and average annual wages?” and the “What are the permissible ways to count hours of service?” questions on this page for information on how to compute an employee’s hours of service and determining which employees are counted.
Example: For the 2014 taxable year, an employer pays five employees wages for 2,080 hours each, three employees wages for 1,040 hours each, and one employee wages for 2,300 hours. The employer uses a method that counts hours actually worked. The employer’s FTEs would be calculated as follows:
(1) 10,400 hours for the five employees paid for 2,080 hours (5 x 2,080)
(2) 3,120 hours for the three employees paid for 1,040 hours (3 x 1,040)
(3) 2,080 hours for the one employee paid for 2,300 hours (lesser of 2,300 and 2,080)
(4) The total hours counted is 15,600 hours. The employer has seven FTEs (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number).
Q40. How are an employer’s average annual wages determined?
A40. All wages paid to employees (including overtime pay) are taken into account in computing an eligible small employer’s average annual wages. Add up the total wages paid by the employer during the taxable year to its employees (see the “Who is an Employee for Purposes of Determining FTEs and Average Annual Wages” question on this page), and divide that number by the number of FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000). Include only wages paid for hours of service (see the “What are the Permissible Ways to Count Hours of Service?” question on this page). Use wages as defined for purposes of the Federal Insurance Contributions Act (FICA) (without regard to the social security wage base limitation).
Example: For the 2014 taxable year, an employer pays a total of $224,000 in wages to employees and has 10 FTEs. The employer’s average annual wages are $22,000 ($224,000 / 10 = $22,400, rounded down to the nearest $1,000).
Q41. How are average annual wages and FTEs calculated when the employer has a short taxable year?
A41. In accordance with general accounting principles, average annual wages and FTEs must be pro-rated or annualized in calculating the credit. For example, if a small employer has only been in business and paying premiums for 6 months during its first taxable year, it must pro-rate or annualize the employee hours worked and wages earned to reflect the 6 months the employer has been in operation.
Q42. How is the credit reduced if the number of FTEs exceeds 10 or average annual wages exceed $25,000?
A42. The credit phases out for eligible small employers if the number of FTEs exceeds 10, or if the average annual wages for FTEs exceed $25,400 (as adjusted for inflation beginning in 2014). 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 FTE wages exceed $25,400, 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 FTE wages exceed $25,400 and the denominator of which is $25,400. The credit will be reduced based on the sum of the two reductions. This may reduce the credit to zero for some employers with fewer than 25 FTEs and average annual FTE wages of less than $50,800 (as adjusted for inflation).
Example 1: For the 2014 taxable year, Employer has 12 FTEs and average annual wages of $30,000. Employer pays $96,000 in employee premiums, which does not exceed the average premium for the small group market in the employer's rating area.
(1) Credit determined before any reduction: (50 percent x $96,000) = $48,000
(2) Credit reduction for FTEs in excess of 10: ($48,000 x 2/15) = $6,400
(3) Credit reduction for average annual wages in excess of $25,400: ($48,000 x $5,000/$25,400) = $9,449
(4) Total credit reduction: ($6,400 + $9,449) = $15,849
(5) Total 2014 tax credit: ($48,000 – $15,849) = $32,151
Example 2 (Tax-Exempt Eligible Small Employer): Same facts as Example 1, but Employer is a tax-exempt eligible small employer and the total amount of Employer’s payroll taxes equals $30,000 for calendar year 2014.
(1) Credit determined before any reduction: (35 percent 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 $25,400: ($33,600 x $5,000/$25,400) = $6,614
(4) Total credit reduction: ($4,480 + $6,614 = $11,094)
(5) Employer’s payroll taxes: $30,000
(6) Total 2014 tax credit: ($33,600 – $11,094) = $22,506 (the lesser of $22,506 and $30,000).
Q43. How is eligibility for the credit determined if the employer is a member of a controlled group or an affiliated service group?
A43. Members of a controlled group (e.g., businesses with the same owners) or an affiliated service group (e.g., related businesses where one performs services for the other) are treated as a single employer for purposes of the credit. For example, all employees of the controlled group or affiliated service group, and all wages paid to employees by the controlled group or affiliated service group, are counted in determining whether any member of the controlled group or affiliated service group is a qualified employer. Rules for determining whether an employer is a member of a controlled group or an affiliated service group are provided under sections 414(b), (c), (m) and (o) of the Code.
Example: A taxpayer owns 100% of a sole proprietorship and files a Schedule C. The taxpayer also owns at least 80% of the voting power or value of the shares of an S Corporation. Even if the sole proprietorship and the S Corporation individually meet the requirements for the small business health care tax credit, section 414 of the Code and related regulations provide that there is common control under section 1563(a) of the code and when there is common control, the taxpayer must calculate their credit including the employees, their wages and premiums paid for all entities as one entity.|