On March 30, 2010, President Obama signed the Health Care Reconciliation Act which added a tax credit for employee health insurance expenses of small employers for taxable years beginning in 2010 through taxable years beginning in 2013.
The tax credit is available if:
(1) the employer has fewer than 25 full-time equivalent employees (FTEs)
(2) the average annual wages per FTE is less than $50,000, and
(3) the employer maintains a “qualifying arrangement”
The credit is fully available to an employer with 10 FTEs and average annual wages of $25,000. The credit phases out pro rata so that an employer with 25 FTEs with average annual wages of $50,000 is not entitled.
Number of Employees for the Taxable Year
The number of FTEs is determined by counting employees who perform services for the employer. Generally, sole proprietors, partners in a partnership, more than 2 percent shareholders of an S corporation, and more than 5 percent owners of any other business are not included in the count. In addition, seasonal workers who work fewer than 120 days in the year are not counted.
Next, determine the number of hours that each worker who is included in the count works during the taxable year, but not more than 2080 hours for any employee. Generally, you count hours for which the employee is paid for working. You can also count up to 160 hours of paid time off.
Determine the number of FTEs by dividing the total number of hours worked by each employee by 2080. A fraction is rounded down to the next whole number.
Average Annual Wages per FTE for the Taxable Year
Determine the average annual wages by dividing
(1) the total wages paid by the employer to the employees counted as FTEs by
(2) the number of FTEs for the year, and
(3) rounding the result down to the nearest $1,000.
For example, if the employer pays $224,000 in total wages and has 10 FTEs, it pays average annual wages per FTE of $22,000 ($224,000 divided by 10 equals $22,400, which is rounded down to the nearest $1,000).
Qualifying Arrangement
The credit is available only for premiums paid by the employer under a qualifying arrangement. The health plan is a qualifying arrangement if the employer pays a uniform percentage (but not less than 50%) of the premium.
The amount of employer-paid premiums that can be used in calculating the credit is limited to the average premium for the small group market in the employer’s state. The average premium information is included in the instructions for Form 8941(used to compute the credit)
Transition Relief for 2010.
Because the credit applies to 2010, including premiums paid by the employer before the Healthcare Reform Act became law, if the employer pays at least 50 percent of the premium for single coverage, it will be deemed to satisfy the uniformity requirement.
Determining the Credit
For taxable employers, the maximum credit is 35 percent of the employer’s premium payments. For a tax exempt employer, the credit is 25 percent.
The credit phases out if the number of FTEs is greater than 10 and/or the average wage per FTE exceeds $25,000. The reduction has two parts: a reduction if the number of FTEs is greater than 10 and a reduction if the average wage is greater than $25,000. If the number of FTEs is greater than 10, the credit is reduced by a fraction, the numerator of which is the number of FTEs over 10 and the denominator of which is 15. If the average wage exceeds $25,000, the credit is reduced by a fraction, the numerator of which is the amount of wages over $25,000 and the denominator of which is $25,000. If both reductions apply, each amount is subtracted from the credit.
For example, if a taxable employer has 12 FTEs, average wages of $30,000, and an initial credit of $33,600, the reductions are determined as follows:
- reduction for FTEs over 10: 2/15 times $33,600 equals $4,480
- reduction for average wages over $25,000: 5,000/25,000 times $33,600 equals $6,720
The total reduction is $11,200 ($4,480+$6,720) and the allowable credit is $22,400.
Claiming the Credit
Form 8941 if used to figure the credit . A taxable employer treats the credit as a general business credit and offsets its tax liability for the year by the amount of the credit. The credit can be used in some cases against the employer’s alternative minimum tax liability.
Taking a Health Insurance credit against the full prevailing wage fringe benefit and reporting it correctly on the Federal WH-347 Certified Payroll Report can be very confusing. This question was asked by a reader who recently requested our 4 Ways Contractors Pay Prevailing Wage Fringe Benefits eBook.
This is an issue that has been extensively belabored in our office (by me).
We are an open shop, but sometimes do jobs with a union agreement. We do a lot of prevailing wage jobs and private work.
We offer all of our employees health insurance – the company paying 75% of the monthly premium and the employees paying the remaining 25% through employee deductions.
It gets so confusing and reading all the blogs etc. does not clarify it for me. I must be slow 
How can I be sure that I am correctly accounting for this?
Constantly confused…. Thank you
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Taking a Health Insurance credit against the full prevailing wage fringe benefit IS confusing, it’s NOT just you.
From what “I” know (and realize that I’m in Vermont and know enough about prevailing wage rules & regulations to be dangerous – I may not know all the fine print for your specific state). I will explain what I know and you should then verify it with the Prevailing Wage Unit of your local Department of Labor just to make sure.
First you are going to need to determine what the monthly company contribution is for each employee, and for the sake of the rest of this example; let’s assume that we have an employee named Frank and your company pays $173.33 a month toward his health insurance.
Step 1 – Take the $173.33 -> multiply it by 12 = this equals the annual maximum company contribution ($2,079.96).
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Step 2 – Take the annual company contribution ($2,079.96) and divide it by 2080 hours -> this will give you an “hourly credit” of $0.99 – remember as far as prevailing wage fringes go everything is based on an hourly rate.
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In QuickBooks edit Frank’s employee record -> going to the Payroll and Compensation tab -> in the Additions, Deductions and Company Contributions block, find the health insurance contribution item and enter BOTH the hourly “rate” and the annual maximum.
So now let’s say that Frank is classed as a Flagger making $11.15 per hour and the full fringe package is $4.40 per hour and based on your calculations above he has a $1.00 per hour company paid health insurance contribution. In QuickBooks his rate of pay becomes $14.55 ($11.15 base PLUS $3.40 cash fringe).?
When you generate your Federal WH-347 certified payroll report you will want to pay special attention to Column 6 – Rate of Pay/Cash Fringes. Here you will want to report $11.15 (base rate)/$3.40 (balance of fringe benefit rate paid in cash).
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On the Statement of Compliance you will want to check BOTH boxes 4a – Fringe Benefits paid to approved plans, funds or programs AND 4b – Fringe Benefits are paid in cash.
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Important Notes:
- 2,080 hours is a construction industry standard number of work hours per year. It is based on 40 hours per week in a 52 workweek period.
- You’ll want to edit BOTH the company contribution and employee deduction payroll items and indicate that each has an annual limit in order for QuickBooks to automatically stop withholding when the annual limits have been reached.
- On a weekly basis, both the company contribution and employee deduction should be calculated based on the TOTAL number of hours the employee worked on BOTH private and prevailing wage jobs.
- When the company’s annual contribution limit has been reached you will want to “add” the credit back to the employee’s hourly rate of pay for the balance of the year.
- You’ll need to perform these calculations each time health insurance premiums change.
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Screenshots of the WH-347 Certified Payroll Report and Statement of Compliance were taken from actual reports that were generated using Certified Payroll Solution and QuickBooks data. Learn more about Certified Payroll Solution by clicking here.
Learn more tips like this by signing up for our 2 hour “How to Fulfill Your Certified Payroll Reporting Requirements” webinar.
Each Friday, here on the QuickBooks for Contractors blog, we will be offering a free QuickBooks related eBook, offering tips, tricks, and training – so stayed tuned, visit often or sign up to have our posts delivered daily via email.
This week’s eBook provides information and tips for setting up a system to track Subcontractors Workers Compensation and General Liability Insurance expiration dates.
When a contractor works on a construction project and he/she hires subcontractors; one of the things that he is required to keep on file is a CURRENT copy of each subcontractors Worker’s Compensation Insurance Policy and a copy of their General Liability Insurance.
Keeping track of expiration dates and making sure that you always have a copy of the current policy on hand, can be a daunting task.
A reader wrote to ask the following question:
I have a vendor (subcontractor) whose general liability insurance expired. In QuickBooks I was able to produce a check for them. How do I QuickBooks to notify me that their insurance has expired?
Answer:
Unlike some of the more costly construction specific software programs out there, QuickBooks wasn’t designed to prevent us from generating a check to a Vendor/Subcontractor whose General Liability or Worker’s Compensation insurance has expired.
The QuickBooks Premier (or Enterprise) Contractor edition does have a “section” in the Additional Info tab of the Vendor Record where you can enter an expiration date for both Worker’s Comp and General Liability insurance – and if you enter dates in these fields you will get a warning when using a vendor whose insurance has expired – however, it will not prevent you from writing the check, entering the bill, or creating a purchase order.
In other versions of QuickBooks Pro, Premier, or Enterprise; you can create “Custom Fields” to use in the Vendor record – but they will not produce even a warning.
There are several things that you can do – but none of them will automatically “warn” you before the Subcontractors insurance does expire OR prevent you from writing them a check after it has expired.
One thing that you can do is have your Vendors/Subcontractors request a Certificate of Insurance from their insurance company, listing you as a Certificate Holder. That way you receive a Certificate showing the policy period AND you would also be notified if the coverage was canceled or if it expired.
Even having access to this information directly from the Vendors insurance agent isn’t enough if you don’t have a policy and/or procedure in place for tracking this.
While QuickBooks won’t do anything automatically for you, it will provide you with tools (date tracking, report generation, letter creation, Reminders, and To Do Notes) to implement a good system for tracking this information.
Request our FREE eBook – “QuickBooks Tips & Techniques – Setting Up & Tracking Subcontractors Worker’s Comp Insurance”.
This FREE 13-page eBook will provide you with complete instructions for setting up and maintaining a system for tracking expiration dates of Subcontractors Worker’s Comp AND General Liability Insurance.
Sam Subcontractor already uses QuickBooks, he has more complex job costing needs due to certified payroll reporting requirements, payments of prevailing wage fringe benefits and AIA billing. High overhead costs, specialized equipment, materials, labor charges are other things that must be taken into consideration.
QuickBooks Estimating, Job Costing, and payroll needs will vary depending on the type of contractor you will be dealing with, so if anyone dares to suggest that one “Chart of Accounts or bookkeeping method” will work for all contractors – well you just shouldn’t listen to them, and here’s why:
Meet Sam Subcontractor:
I have worked for a lot of “Sam’s” they are great people too. They usually have the same basic philosophy as Harry the Handyman; however, because they have employees and bigger “operations” they realize that they need to consider more things when they go out to bid on a job; but they do not always realize all of what they need to take into consideration.
Sam has overhead costs, employees, specialized equipment, company vehicles, materials, and more that he needs to take into consideration when estimating. He works on private and prevailing wage jobs. When he works on prevailing wage jobs he has to pay his employees a much higher rate of pay plus prevailing wage fringe benefits and submit weekly certified payroll reports. Billing requirements for his jobs include Time & Materials and Percentage of Completion, where he needs to submit AIA billing forms and track retainage.
Sam tells you that he was just awarded a contract on an ARRA funded construction, the job will last about 18 months and he has to pay prevailing wages to his employees, submit certified payroll reports, monthly ARRA reports, and AIA format billings and will need to hire 5 additional employees. He is nervous – his workers comp and general liability insurance premiums are killing him; he knows that part of his high overhead is due to the fact that he is paying the prevailing wage fringe benefit it cash to his employees.
Sam has QuickBooks Pro 2008 and he has used it to run payroll for his employees. He has been using Excel to do his bidding, billing, certified payroll reports, and his job costing. He knows that he has to make sure that he is bidding high enough to make a profit and stay in business; yet not so high that he is no longer competitive.
Let’s look at some of Sam’s costs that you as his bookkeeper, ProAdvisor, CPA should help him identify for estimating and job costing purposes.
- Overhead – rent, phone, electric, trash service, etc.
- Liability Insurance
- Worker’s Compensation Insurance
- Wages (private & prevailing wage jobs)
- Employee Benefits – health insurance (?)
- Tool Purchases
- Materials
- Prevailing Wage Fringe Benefit Costs
- Insurance for vehicles and equipment
- Registration for vehicles and possibly some equipment
- Repairs to vehicles and equipment
- General Maintenance for vehicles and equipment
- Gasoline and/or Diesel fuel to run vehicles and equipment
- Vehicle & Equipment costs on his jobs
As a bookkeeper, ProAdvisor, or CPA with a client like Sam, you are going to have to spend some extra time helping Sam set up his books.
You will find that Sam is going to be more than willing to make changes – but that he is NO bookkeeper! He also knows that he needs to make things easier because he is spending too much time in the office doing paperwork – when he needs to be on the jobsite.
One of your biggest challenges with Sam will be communication – he is going to talk construction and you are going to be talking accounting…..learn his language and help him learn yours.
A basic plan of action for Sam would be to:
- Move his Excel based tasks into QuickBooks
- Turn his Estimating Cost Code list into a QuickBooks Item List
- Teach him to use the QuickBooks Estimate function to do his bidding
- Teach him how to use QuickBooks for Job Costing
- To automate his Time & Materials Billing
- To run Estimate vs Actual Reports so he can tell how much money he’s making & if he is bidding accurately
- Teach him how to job cost his payroll by using Weekly Timesheets
- Teach him to use Purchase Orders to track material purchases
- Implement Workers Comp and General Liability tracking
- Implement Vehicle and Equipment Costing procedures
- Implement a Retainage Tracking system
- Research ways in which to lower General Liability and Worker’s Compensation costs
- Implement QuickBooks integrated applications to deal with AIA Billing, Certified Payroll, and the ARRA Reporting
Sam will feel very overwhelmed and out of his element, he will probably want to hire you for on-going review of his QuickBooks file, just to make sure that he is doing things right – he may even want to hire you to come in on a weekly basis to help him out.
TIP: Paying prevailing wage fringes in cash will increase Sam’s General Liability and Worker’s Compensation costs, especially if they are based on gross payroll instead of gross sales.
Request our free eBook on 4 Ways Contractors Pay Prevailing Wage Fringe Benefits.
