Who qualifies for the Small Business Health Care Tax Credit?
You must meet all four tests in the same tax year. The IRS counts employees differently from the 30 hour rule used for the employer mandate, so count again even if you know your other head count.
- You had fewer than 25 full time equivalent employees (FTEs). An employer with 48 half time employees has 24 FTEs and can claim the credit.
- You paid average annual wages of less than $67,000 per FTE for tax year 2025. The draft 2026 form raises the limit to $69,000.
- You paid at least 50% of the cost of employee only coverage for each enrolled employee, at the same percentage for everyone.
- You bought coverage through SHOP, which is generally the only way to claim the credit.
An employer with exactly 25 FTEs does not qualify, even though the law says no more than 25, because the phase out reduces the credit to zero at that size.
The IRS has issued guidance for small employers in areas where no SHOP plan is available. Ask a tax professional if that is your situation.
How much is the credit worth?
The most you can receive is 50% of the premiums you pay for covered employees, or 35% for a tax exempt nonprofit. You can claim it for two consecutive tax years. Two things shrink it: more than 10 FTEs, and average wages above about $33,000.
| Test | Tax year 2025 (final) | Tax year 2026 (draft form) |
|---|---|---|
| Fewer than this many FTEs | 25 | 25 |
| Average annual wages must be less than | $67,000 | $69,000 |
| Credit shrinks above this many FTEs | 10 | 10 |
| Credit shrinks above these average wages | $33,000 | $34,000 |
| Largest credit, for profit employer | 50% of premiums | 50% of premiums |
The 2026 figures come from an IRS draft of the form instructions marked not for filing, so check them again when the final version is published. The IRS has not published figures for tax year 2027.
What is an example of how the credit is calculated?
Start with 50% of the premiums you paid. Subtract a reduction for each FTE above 10, and another for average wages above about $33,000. Average wages are rounded down to a multiple of $1,000, and the IRS worksheet uses $33,300 for the wage reduction.
| Example 1 | Example 2 | |
|---|---|---|
| Full time equivalent employees | 10 | 14 |
| Average annual wages | $25,000 | $45,000 |
| Premiums you paid | $70,000 | $60,000 |
| 50% of premiums | $35,000 | $30,000 |
| Reduction for more than 10 FTEs | $0 | $8,000 |
| Reduction for wages above $33,300 | $0 | $10,541 |
| Credit | $35,000 | $11,459 |
In example 2 the FTE reduction is $30,000 times 4 divided by 15, and the wage reduction is $30,000 times $11,700 divided by $33,300. Example 1 is the one HealthCare.gov uses.
The credit is also limited when your premiums are higher than the average small group premium in your rating area, and by state subsidies. Our small business calculator shows an estimate marked up to because it leaves those limits out.
Which employees count toward the credit?
Count FTEs by hours, not heads. Add every employee's hours of service for the year, with no more than 2,080 for any one person, divide the total by 2,080 and round down. Average wages are total wages divided by FTEs, rounded down to a multiple of $1,000.
- The owner of a sole proprietorship and a partner in a partnership are not counted.
- A shareholder who owns more than 2% of an S corporation is not counted.
- A shareholder who owns more than 5% of a regular corporation, or a person with more than 5% of the capital or profits of another business, is not counted.
- Family members of those owners, and household members who are their dependents, are not counted.
Seasonal workers who work for you 120 days or fewer in the year are left out of the hours and wages. Premiums you pay for them still count toward the credit. Leave excluded owners and family out when you use our calculator.
How do I claim the credit?
You figure the credit on IRS Form 8941, and for most employers it becomes part of the general business credit on Form 3800. Partnerships and S corporations file Form 8941 and pass the credit to their owners. A tax exempt nonprofit claims it on Form 990-T, and it is refundable but limited by certain payroll taxes.
You must reduce your deduction for employee health insurance costs by the amount of the credit. Because the credit depends on payroll, hours and your SHOP plan, talk to a tax professional before you count on it.
Keep your SHOP eligibility results, because proof of eligibility may be needed to enroll and to claim the credit.
Can I get the credit with a CHOICE arrangement or QSEHRA?
Generally no. Enrolling in SHOP coverage is generally the only way to qualify for the credit, so a CHOICE arrangement (ICHRA) or a QSEHRA does not earn it. If the credit would be large for your business, it can tip the choice toward a group plan.
Compare all three before you decide. Our guide to CHOICE arrangements, QSEHRAs and group plans shows the differences side by side.
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