How to Claim the Small Business Health Care Tax Credit

The Small Business Health Care Tax Credit is a federal tax incentive designed to assist small employers in affording the cost of health insurance for their employees. Its purpose is to encourage smaller companies to provide health benefits, a significant expense that can be a barrier to offering competitive employee compensation packages. This credit specifically targets businesses and tax-exempt organizations with a smaller workforce and moderate wage levels. By offsetting a portion of the employer-paid insurance premiums, the credit aims to make health coverage more accessible for these groups.

Determining Your Eligibility

To qualify for the tax credit, a business must satisfy four conditions. First, an employer must have fewer than 25 full-time equivalent (FTE) employees for the tax year. This calculation is not merely a head count of full-time staff; it combines both full-time and part-time employee hours.

Calculating your FTE count involves a specific formula. You first count the number of full-time employees, defined as those working 30 or more hours per week. Next, you sum the total hours worked by all part-time employees for the year and divide that figure by 2,080. For example, if you have four part-time employees who each worked 1,040 hours, their combined 4,160 hours would equal two FTEs. These two FTEs are then added to your number of full-time employees to arrive at the total FTE count.

Second, the average annual wage paid to your employees must be less than an amount that is adjusted annually for inflation; for 2025, this threshold is $66,600. To determine your company’s average annual wage, you divide the total wages paid to all employees during the tax year by your number of FTEs. Wages paid to business owners, partners, or certain family members are not included in this calculation.

Third, the employer must pay a uniform percentage of the premium cost for each enrolled employee, which must be at least 50% of the premium for employee-only coverage. The 50% minimum contribution applies to the premium for individual coverage, not for more expensive family or dependent coverage options.

Fourth, the employer must offer a qualified health plan through the Small Business Health Options Program (SHOP) marketplace. To claim the credit, the employer must first receive an eligibility determination from the Marketplace. The credit is also only available to an eligible employer for two consecutive taxable years.

Calculating the Credit Amount

Once eligibility is confirmed, the next step is to calculate the potential credit amount. The maximum credit is 50% of the employer-paid premiums for small businesses and 35% for qualifying tax-exempt organizations. The actual credit amount is often lower due to phase-out rules that reduce the credit based on employee count and average wages.

The credit begins to phase out for employers with more than 10 FTEs. A similar phase-out occurs based on average annual wages, beginning when they exceed $33,300 for 2025. The credit is completely phased out once the FTE count reaches 25 or the average annual wage hits the upper limit of $66,600.

The calculation involves a multi-step process. An employer calculates a reduction percentage for the excess FTEs and another for the excess wages. The larger of these two reduction percentages is then applied to the maximum potential credit, diminishing the final amount.

The final credit is also limited. It is calculated as the lesser of two amounts: the employer’s actual premium contributions or the premiums that would have been paid based on the average premium for the small group market in the employer’s geographic area. This means a business cannot claim a credit based on an unusually expensive health plan, as the credit is capped by what is considered a standard premium cost in their location.

Information and Forms for Claiming the Credit

To claim the credit, you must gather specific financial data from your records. You will need to document the following, ensuring you separate the hours and wages of owners and their family members:

• Total number of employees
• Detailed calculation of your FTE count
• Total wages paid to employees
• Total health insurance premiums you paid on their behalf

The primary document for calculating and claiming the credit is Form 8941, Credit for Small Employer Health Insurance Premiums. The official form and its detailed instructions, which provide line-by-line guidance, can be downloaded from the IRS website.

Completing Form 8941 involves systematically working through its parts. You will enter your calculated number of FTEs, average annual wages, and the total premiums you paid, and the form then guides you through the phase-out calculations. The form requires you to compare your actual premium payments to the benchmark of the average premiums for your state’s small group market. The final result of the form is your allowable credit amount, which is the figure you will carry forward to your business’s main tax return.

The Filing Process

With a completed Form 8941, the next step is to transfer the calculated credit amount to the appropriate tax forms. The credit is a component of the general business credit, so the amount from Form 8941 is reported on Form 3800, General Business Credit. This form consolidates various business credits into a single total.

For tax-exempt organizations, the credit amount is claimed on Form 990-T, Exempt Organization Business Income Tax Return. An organization must file Form 990-T to claim the credit, even if it would not normally be required to file this return.

After the credit is reported on Form 3800, the total general business credit is then carried to the employer’s primary income tax return. This could be Form 1120 for corporations, Form 1065 for partnerships, or Schedule C of Form 1040 for sole proprietorships. This final step integrates the credit into your overall tax liability or refund calculation for the year.

Finally, the employer must reduce their business expense deduction for health insurance premiums by the amount of the tax credit received. For example, if you paid $20,000 in premiums and claimed a $7,000 credit, you may only deduct the remaining $13,000 as a business expense. This prevents a double tax benefit on the same premium dollars.