The Section 45o Small Business Health Care Tax Credit

The Small Business Health Care Tax Credit, established under Internal Revenue Code Section 45R, is a federal tax incentive designed to help smaller employers manage the cost of providing health insurance. The credit directly reduces an employer’s tax liability, making it more financially feasible to either start offering health benefits or continue providing existing coverage.

Employer Eligibility Requirements

To qualify for the credit, an employer must meet four specific tests.

Full-Time Equivalent (FTE) Employees

An employer must have fewer than 25 full-time equivalent (FTE) employees for the tax year. The number of FTEs is determined by taking the total hours of service for which the employer paid wages to all employees during the year and dividing that number by 2,080. The result, if not a whole number, is rounded down. Certain individuals, such as sole proprietors, partners in a partnership, and more-than-2% S-corporation shareholders, are not included in this calculation.

Average Annual Wages

The average annual wages paid by the employer must be less than an inflation-adjusted threshold, which for 2025 is $66,600 per FTE. To calculate this figure, the employer divides the total wages paid to employees during the tax year by the number of FTEs calculated previously. The result is then rounded down to the nearest $1,000.

Employer Premium Contribution

A requirement is that the employer must pay at least 50% of the premium cost for single (employee-only) health care coverage for each enrolled employee. This contribution must be uniform for all participating employees. The 50% rule applies specifically to the employee’s self-only coverage, not for any additional costs associated with family or dependent coverage.

Qualifying Arrangement

To be eligible for the credit, the employer must provide coverage through a qualifying arrangement by enrolling in a Small Business Health Options Program (SHOP) plan. Enrollment must be completed by contacting an insurance company directly or by working with a SHOP-registered agent or broker.

Calculating the Credit Amount

The calculation of the Small Business Health Care Tax Credit is tiered and subject to several limitations. The maximum credit available is 50% of the employer-paid premiums for for-profit businesses and 35% for tax-exempt organizations.

The starting point for the calculation is the actual amount of premiums the employer paid, but only the portion that meets the 50% minimum contribution for single coverage. This figure is then compared to a second amount: the average premium for the small group market in the employer’s geographic area. The credit is ultimately based on the lesser of the employer’s actual premium contributions or these state-average premium figures.

The credit amount is further reduced if the employer has more than 10 FTEs or if average annual wages exceed a certain threshold, which for 2025 begins at $33,300. The reduction is proportional, meaning the more FTEs over 10 an employer has, or the higher their average wages are above the threshold, the smaller the credit becomes. These phase-outs can significantly decrease the final credit amount.

How to Claim the Credit

Once an employer determines they are eligible and calculates the credit amount, the claim is made using IRS Form 8941, Credit for Small Employer Health Insurance Premiums.

The amount from Form 8941 is then transferred to Form 3800, General Business Credit, which is filed with the business’s annual income tax return. For tax-exempt organizations, the credit is claimed on Form 990-T, Exempt Organization Business Income Tax Return. An eligible employer can only claim this credit for two consecutive taxable years.