Family Business Owners Lose on Health Insurance Tax Credits


If you own a small family business and you employ your children, siblings, or other family members, you won’t get the health insurance tax credit for them. That’s because there is a little-known clause in the new health care reform law that disallows or severely limits that tax credit.

Family-owned businesses, the mom-and-pop businesses, are the backbone of this country. According to the Small Business Administration [SBA] Office of Advocacy, small businesses have generated 64 percent of net new jobs over the past 15 years and pay 44 percent of total US private payroll. Fifty-two percent are home-based, and they employ more than 50 percent of all private sector employees. Companies with fewer than 20 workers employ 21.6 million people, according to the SBA.

Small businesses have been especially hard-hit when it comes to affording health insurance for their employees. That’s why the promised health insurance tax credit as part of the new health reform sounded so appealing to small business owners.


In a recent Boston Globe article, Bill Vernon, Massachusetts director of the National Federation of Independent Business, noted that “lots of businesses with five or six workers would have family members.” Owners of those businesses are gradually discovering that the health insurance tax credit does not apply to Uncle Joe, Aunt Clara, brother Bob, or even one’s mother-in-law if they are employed by the business.

In an Internal Revenue Service bulletin, it is explained that family members of a business owner or the owner’s partner are not viewed as employees for ‘the purposes of this [tax] credit.” These “nonemployees” include children or descendants of a child, siblings and step-siblings, parents or ancestor of a parent, step-parents, nieces and nephews, aunts and uncles, and all the in-laws: son, daughter, father, mother, brother, and sister.

The federal tax credit, which is retroactive to January, is calculated on a sliding scale. It allows small businesses to claim a credit worth up to 35 percent of the company’s costs for health insurance for its workers. Businesses that qualify for the credit must employ fewer than the equivalent of 25 full-time workers, have average yearly wages of $50,000 or less, and cover at least half of the cost of health care for their employees. The full 35 percent tax credit applies to businesses that have 10 or fewer full-time employees and average annual salaries of $25,000 or less.

Exactly how many family-owned businesses employ mostly family members is not known, as the US Bureau of Labor Statistics does not track that information. However, disallowing the health insurance tax credit for family member employees of small businesses is a severe blow to a significant and already struggling segment of the work force and the economy.

Boston Globe, May 30, 2010
Small Business Administration