How to Qualify for the Eligible Small Business Credit
Learn if your small business can reduce its tax liability with the health care tax credit by meeting specific employee and contribution thresholds.
The Small Business Health Care Tax Credit is a federal tax incentive designed to help smaller employers provide health insurance for their employees. This credit specifically targets businesses that are offering coverage for the first time or are working to maintain existing health plans. The credit directly reduces a business’s tax liability.
Determining Your Eligibility
To qualify for the credit, a business must satisfy four specific requirements. Meeting all four conditions is necessary to be considered an “eligible small employer” in the eyes of the IRS.
The first test involves the size of your workforce, which must be fewer than 25 full-time equivalent (FTE) employees. To calculate this, you first count your full-time employees who work 2,080 hours or more per year. Then, you total the hours worked by all part-time employees (those working fewer than 2,080 hours) and divide that sum by 2,080. The result, rounded down to the nearest whole number, is your part-time FTE count, which you add to your full-time employee count to get your total FTEs.
Next, the average annual wages paid to these FTEs must be below an inflation-adjusted threshold. For the 2025 tax year, this amount is less than $66,600. To determine your company’s average annual wage, you sum the total wages paid to all employees during the year and divide it by the number of FTEs you calculated. Wages of owners, partners, or shareholders with more than 2% ownership are excluded from this calculation.
A third condition is that the employer must pay at least 50% of the premium cost for single (employee-only) coverage for each enrolled employee. This contribution must be uniform, meaning you pay the same percentage for everyone. The 50% rule applies specifically to the employee’s self-only plan, even if they elect more expensive family coverage.
Finally, the health insurance plan must be purchased through the Small Business Health Options Program (SHOP) Marketplace. The SHOP Marketplace is an online portal where eligible small businesses can compare and purchase certified health plans.
Calculating the Credit Amount
Once eligibility is confirmed, the next step is to calculate the actual credit amount. The maximum credit available depends on the type of organization. For-profit businesses can receive a credit of up to 50% of the premiums they paid, while tax-exempt, non-profit organizations are eligible for a maximum credit of 35%.
The calculation is based on the employer’s premium contributions. The credit is figured on the lesser of the actual premiums paid by the employer or the average premium for the small group market in the business’s specific rating area. This prevents businesses from receiving an inflated credit by purchasing unnecessarily expensive plans.
The full credit is only available to the smallest of employers, specifically those with 10 or fewer FTEs and average annual wages of $33,300 or less. For businesses that exceed these numbers, the credit amount is gradually reduced through a phase-out process. The credit is reduced if the business has more than 10 FTEs or if average wages exceed this threshold.
The Small Business Health Care Tax Credit can only be claimed for two consecutive taxable years. This two-year period begins with the first year the employer files Form 8941 to claim the credit. This limitation underscores the credit’s design as a temporary support mechanism to help businesses establish and sustain their health insurance offerings.
How to Claim the Credit
Claiming the credit involves completing a specific IRS form and carrying the result to your main tax return. This process ensures the credit is properly documented and applied against the business’s tax obligations.
The primary document for this process is Form 8941, Credit for Small Employer Health Insurance Premiums. This form walks you through the entire calculation, from inputting your FTE count and average annual wages to figuring the premium-based limitations and phase-out reductions. The worksheets included with the Form 8941 instructions are used to determine the precise figures for FTEs, wages, and creditable premiums paid.
Once Form 8941 is completed and the final credit amount is determined, that figure is transferred to another form. For most businesses, the credit is reported on Form 3800, General Business Credit. Form 3800 is used to aggregate various individual business credits into a single total that can be applied against tax liability.
The total from Form 3800 then flows to the business’s main income tax return, such as Form 1120 for corporations or Form 1040 for sole proprietors. For tax-exempt organizations, the process is slightly different; they claim the credit on Form 990-T, Exempt Organization Business Income Tax Return. This final step integrates the credit into your overall tax filing, directly reducing the amount of tax owed.