PEO Clients - Did you claim your tax credit?

US Treasury Report - Health Care Tax Credits for PEO Clients Go Unclaimed

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act were signed into law in March 2010.  Among the credits contained in this legislation was the Small Business Health Care Tax Credit.  The credit was designed to encourage small employers to offer health care insurance. It is available only to small employers who pay at least one-half the cost of health insurance coverage for their employees.

The Congressional Budget Office estimated the credit would cost $37 billion over 10 years and that taxpayers would claim up to $2 billion of Credit for Tax Year 2010. However, in a recent report by the US Treaury Inspector General, as of mid-May 2011, just more than 228,000 taxpayers had claimed the credit for a total amount of more than $278 million. An audit to determine whether the IRS adequately implemented and processed the credit found that while their efforts were mostly successful, some improvements are needed since the number of claims for health care tax credits has been much lower than anticipated.

“The Small Business Health Care Tax Credit is an important credit for both small business employers and their employees,” said TIGTA Inspector General J. Russell George in a statement. The IRS sent postcards to businesses that might potentially qualify for the credit to make sure they were aware of it, the IRS did not have ready access to data that would allow it to determine which of these businesses actually offered health insurance to their employees or otherwise qualified for the credit. He believes the report’s recommendations, once adopted, should improve the IRS’s ability to verify claims for this credit.”

Report - Professional Employers Should Identify Clients

While some businesses, such as companies that only process payroll and file tax returns on behalf of other businesses, disclose similar arrangements to the IRS, this is generally not the case for the PEOs. Other arrangements, where one business acts as an agent for another business, are disclosed on the forms for Employer/Payer Appointment of Agent (Form 2678) and the Allocation Schedule for Aggregate Form 941 Filers (Schedule R (Form 941)).  However, the PEO business model is premised on the PEO’s view that it is a legal employer, not the agent of the client business.

The PEO, acting as the employer of the leased employees, files employment tax returns under its own Employer Identification Number, and the client businesses where the employees work claim other employment-related expenses and the related deductions and credits (as long as these were paid by the client business) under their (different) Employer Identification Numbers. One remedy the report recommends is to have the Commissioner, Small Business/Self-Employed Division track PEO relationships by inputting cross-referenced Employer Identification Numbers on the client business tax accounts.

Is your small business using the services of a professional employer organization. Are you the owner of a small firm who is providing health insurance for your employees and paying at least 50% of the premium? Then you may qualify for the “Small Business Health Care Tax Credit”. We suggest you contact the employee benefits department at your employee leasing company or professional employer, or you can click on this link.