Small Business Health Care Tax Credit: Who Qualifies

The small business health care tax credit pays back up to 50% of the health insurance premiums an employer pays for its staff, or up to 35% for a tax-exempt employer. To qualify for 2025, a business needs fewer than 25 full-time equivalent employees, average annual wages under $67,000 per full-time equivalent, and a plan bought through the Small Business Health Options Program (SHOP) Marketplace that pays at least half of each employee's own coverage.

The rules below come from the IRS instructions for Form 8941, the form every employer uses to work out the credit, and from the IRS page on the credit and the SHOP Marketplace. The credit can be claimed for two consecutive tax years only, so it pays to know whether a business qualifies before it signs up for a plan.

Who qualifies: the four tests

Passing all four tests opens the credit. How much of it a business gets then depends on its size and its pay: the smaller the employer and the lower the average wage, the bigger the credit.

How much the credit is worth

The maximum credit is 50% of the premiums a small business paid, and 35% for a small tax-exempt employer. The full amount goes to the smallest, lowest-paying employers. The credit starts to shrink once a business has more than 10 FTEs, and it falls to zero at 25 FTEs or more.

Pay works the same way. For 2025, the credit is reduced when average annual wages pass $33,000, and it is zero at $67,000 or more. For 2024 the two figures were $32,000 and $65,000. The two reductions are worked out separately, so a business with more than 10 FTEs and wages above the lower figure can see both cut its credit, sometimes to nothing.

The IRS gives a plain example. An employer that pays $50,000 a year toward its employees' premiums and qualifies for a $10,000 credit each year saves $20,000 over the two years.

Premiums above the credit are still a business expense, so an eligible small business can take both the credit and a deduction for the rest of what it paid. A business that owes no tax that year can carry the credit back or forward to other tax years.

The wage limit by tax year

The average wage limit rises with inflation each year. These are the figures the IRS has published for each tax year.

How to count full-time equivalents and average wages

For this credit, one FTE is 2,080 hours of work a year. That is different from other parts of the Affordable Care Act, which count 30 hours a week as full time. Part-time hours are added together: two half-time employees count as one FTE, and 20 half-time employees count as 10. Hours above 2,080 for any one employee are left out. The total hours are divided by 2,080 and rounded down to a whole number.

Some people are left out of the count altogether, along with their wages and the premiums paid for them:

• the owner of a sole proprietorship
• a partner in a partnership
• a shareholder owning more than 2% of an S corporation
• anyone owning more than 5% of the business
• family members of any of the above

Seasonal workers who work 120 days or fewer in the year are also left out of the FTE count and the average wage, but the premiums paid for them still count toward the credit.

Average annual wages are total wages divided by the number of FTEs, rounded down to the nearest $1,000. The IRS example: $200,000 of wages paid to 10 FTEs is an average of $20,000.

The SHOP Marketplace rule

Since 2014 the credit has been tied to coverage bought through a SHOP Marketplace, or through a state's direct enrollment process where one exists. A stand-alone dental plan offered through a SHOP exchange also counts as a qualified health plan. HealthCare.gov shows whether SHOP plans are sold in a county.

Two places need care. Employers in Hawaii cannot claim the credit for plan years beginning after 2016, under the state's waiver from the Affordable Care Act. And for 2025, some counties had no SHOP plans for employers to offer; an employer based in one of those counties can still claim for 2025 if it properly claimed the credit for all or part of 2024.

How to claim it

1. Work out the FTEs, the average annual wages and the premiums paid, using the worksheets in the Form 8941 instructions.
2. Fill in Form 8941, Credit for Small Employer Health Insurance Premiums.
3. A taxable business carries the amount to Form 3800 as part of the general business credit on its income tax return.
4. A tax-exempt employer claims it on Form 990-T, even if it does not usually file one. Its credit is refundable but cannot exceed the income tax withheld from employees and the Medicare tax for the year.

A business that qualified in an earlier year but did not claim can still file an amended return. The claim for a refund generally has to be made within three years of filing the return, or two years of paying the tax, whichever is later.

Is it worth checking?

For a business of under 10 people on modest wages that already pays for health cover, yes: the credit can return a large share of what it spends on premiums for two years. For a business close to 25 FTEs or paying average wages near the limit, the reductions can leave little or nothing, so it is worth running the numbers through the Form 8941 worksheets before choosing a plan. For other ways to bring costs down, see practical ways small businesses cut costs, and for grants and loans, small business grants and funding programs.