Small Business Health Care Tax Credit: Who Qualifies and How Much

By Michael Sprague, Licensed Health Insurance Agent · Reviewed by Heather Sprague, Licensed Health Insurance Agent

The small business health care tax credit can pay back up to 50% of the premiums you pay for your employees' health coverage. Tax-exempt employers can get up to 35%. It is a credit, not a deduction, so it lowers your tax bill dollar for dollar.

Many small employers never claim it because the rules look complicated. This guide walks through who qualifies, how the amount is figured and how to claim it. For help choosing a qualifying plan, call 888-730-6031.

Who Qualifies for the Credit?

According to the IRS, your business generally must meet all four of these tests:

• Fewer than 25 full-time equivalent (FTE) employees. Two half-time workers count as one FTE.
• Average annual wages below the IRS limit. The limit is adjusted for inflation each year. It was $62,000 in 2023 and has risen since.
• At least 50% of employee-only premiums paid by you. This must be a uniform percentage for all enrolled employees.
• A qualified health plan bought through the SHOP Marketplace, or a state small business exchange, unless an exception applies.

Who Does Not Count as an Employee

Owners and their family members are left out of the FTE and wage math. That generally includes sole proprietors, partners, shareholders who own more than 2% of an S corporation, owners of more than 5% of other businesses, and their spouses and certain relatives. Seasonal workers who work 120 days or fewer a year are usually left out too.

Because owners are excluded, a business made up only of owners and family cannot claim the credit.

How Much Is the Credit Worth?

The full 50% credit goes to employers with 10 or fewer FTEs and the lowest average wages. The credit shrinks as you add FTEs above 10 or as average wages rise. It reaches zero at 25 FTEs or at the wage limit.

Business profile	Credit size
10 or fewer FTEs, low average wages	Up to the full 50%
11 to 24 FTEs	Reduced, about 1/15 less for each FTE above 10
Average wages near the IRS limit	Reduced, phases out at the limit
25 or more FTEs	No credit

The credit is also capped by the average premium for small group coverage in your state. If your plan costs more than that average, the IRS uses the average to figure the credit.

A Simple Example

Say a bakery has 8 FTE employees with average wages well under the phase-out start. The owner pays $40,000 a year toward employee premiums through a SHOP plan. If the plan costs are within the state average, the credit could be up to $20,000, or 50%. That is a direct cut in tax owed.

A business with 15 FTEs and higher average wages would get a smaller share. A tax professional can run the exact numbers.

Which Premiums Count?

Only premiums you, the employer, pay for qualifying employees count. Amounts employees pay through payroll deduction, including pre-tax Section 125 deductions, do not count. Premiums for dental and vision plans bought through SHOP may count when offered as qualified coverage.

You need to apply the same contribution percentage to all enrolled employees. For example, you could pay 60% of employee-only premiums for everyone, but not 80% for managers and 50% for staff.

Tax-Exempt Employers

Charities and other tax-exempt employers can claim up to 35% of premiums paid. Because they may not owe income tax, the credit is refundable for them, but it is limited to the payroll taxes they withheld and paid during the year. They claim it on Form 990-T.

How to Claim the Credit

• Buy coverage through the SHOP Marketplace or a state small business exchange.
• Track premiums you pay for each employee during the tax year.
• Figure FTEs and average wages using payroll records.
• Complete IRS Form 8941, Credit for Small Employer Health Insurance Premiums.
• File it with your tax return. Taxable businesses include it in the general business credit. Tax-exempt employers claim it on Form 990-T.

Only Two Years: Plan Your Timing

You can claim the credit for just two consecutive tax years, starting with the first year you buy SHOP coverage and claim it. Many businesses use those two years to make a new plan affordable while the business grows.

After the two years, you can still deduct premiums you pay as a business expense. You cannot deduct the part of premiums covered by the credit.

Is the Credit Worth It Compared to an HRA?

The credit can be generous for very small, lower-wage teams. But it requires a SHOP plan, a 50% contribution and good participation outside the yearly window. An ICHRA or QSEHRA does not qualify for this credit, but premiums reimbursed through them are deductible and tax-free to employees.

Many owners compare both. If your team is under 10 FTEs and wages are modest, the credit often wins for the first two years.

Common Mistakes

• Counting owners and family members as employees.
• Paying less than 50% of employee-only premiums.
• Buying a plan outside SHOP when no exception applies.
• Missing that the credit only lasts two consecutive years.
• Deducting the full premium and claiming the credit on the same dollars.

Small Business Health Care Tax Credit: FAQ

How much is the small business health care tax credit?

Up to 50% of the premiums you pay for employees, or 35% for tax-exempt employers. Most businesses get less because of the phase-outs.

Can a sole proprietor claim the credit?

Not for their own coverage. Owners are left out of the calculation. A sole proprietor with qualifying employees may claim it for premiums paid for those employees.

Do I have to buy through SHOP?

Generally yes. The credit is tied to qualified health plans offered through the SHOP Marketplace, with limited exceptions.

What form do I use?

IRS Form 8941, Credit for Small Employer Health Insurance Premiums.

Can I claim the credit with a QSEHRA?

No. QSEHRA and ICHRA reimbursements do not qualify.

Next Steps for the small business health care tax credit

If you have fewer than 25 FTEs and modest average wages, price a SHOP plan and ask your tax professional to estimate the credit. Then compare it with other small business health insurance options.

Want a licensed agent to help? Call 888-730-6031, Monday through Friday, 9 a.m. to 6 p.m. Eastern, or request a free quote.

Sources

1. IRS: Small Business Health Care Tax Credit and the SHOP Marketplace
2. IRS: About Form 8941
3. HealthCare.gov: Small businesses

Related Guides

• Small business health insurance
• Small business open enrollment
• QSEHRA for small business
• ICHRA health insurance

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