Tax Strategy: Small Business Health Care Tax Credit

 

If you’re a small business owner struggling to compete with larger companies on employee benefits, you need to know about the Small Business Health Care Tax Credit. This credit is a powerful tool designed to help the smallest employers offer health insurance to their teams, turning a major expense into a significant tax reduction.

 

Unlike a tax deduction, this is a dollar-for-dollar tax credit, which means it directly reduces your tax bill.

 

Is Your Business Eligible? The Three Key Tests

 

The Small Business Health Care Tax Credit is aimed at the very smallest employers. To qualify, you must generally meet three core requirements:

 

1. Fewer Than 25 Full-Time Equivalent (FTE) Employees

 

The IRS uses the Full-Time Equivalent (FTE) calculation to determine your size. This is a mix of your full-time and part-time staff.

  • How it works: Employees working 2,080 hours or more per year count as 1 FTE. The hours of your part-time employees are added up and divided by 2,080 to get their FTE count.
  • The Sweet Spot: The credit is highest for the smallest employers, specifically those with 10 or fewer FTEs.
  • Who is NOT counted: Owners (sole proprietors, partners), their spouses, and certain family members are generally not included in the FTE calculation or in calculating the premium payments for the credit.

 

2. Average Annual Wages Are Below the Limit

 

The average wage you pay your FTE employees must be below an inflation-adjusted limit. This limit changes yearly (for example, it was approximately $66,600 for 2025).

  • The Sweet Spot: The credit is maximized for employers who pay average wages of approximately $33,300 or less (also inflation-adjusted). The credit phases out gradually as your average wages rise above this lower threshold.

 

3. You Pay at Least 50% of the Premium Cost

You must cover at least 50% of the cost of the employee-only (single) health insurance premium for each employee who enrolls in the coverage.

 

What is the Maximum Credit?

 

The credit is calculated as a percentage of the premiums you pay for your employees.

Employer                                                TypeMaximum Credit Percentage

Small Business Employer (For-Profit)    50% of your premium contributions

Tax-Exempt Organization (Non-Profit)   35% of your premium contributions

 

The Two-Year Limit

It is important to note that the Small Business Health Care Tax Credit is only available for two consecutive tax years that begin in 2014 or later. This means you must plan strategically to use this credit to its maximum potential.

 

The SHOP Marketplace Requirement

To be eligible for the maximum credit, you generally must purchase your employees’ qualified health plan through a Small Business Health Options Program (SHOP) Marketplace in your state.

 

The Double Benefit: Credit PLUS Deduction

One of the most valuable features of this credit is that you can often benefit from both a credit and a deduction for the same premium payments.

  1. Claim the Credit: You receive the tax credit (up to 50% of your contribution) which directly reduces the tax you owe.
  2. Claim the Deduction: You can still deduct the portion of the health insurance premiums that is not covered by the tax credit.

 

         Example of Combined Savings:

         You pay $20,000 in employee premiums.

         You qualify for a 50% credit (maximized). Your tax credit is $10,000.

         You can deduct the remaining $10,000 as a business expense.

 

How to Claim the Credit

 

To determine your exact eligibility and calculate the amount of your credit, you must file IRS Form 8941, Credit for Small Employer Health Insurance Premiums, and attach it to your annual tax return (or Form 990-T for tax-exempt organizations).

 

This form walks you through the steps of calculating your FTEs, average wages, and the final credit amount.

 

Takeaway: Making Health Insurance a Reality

 

The Small Business Health Care Tax Credit is one of the most powerful benefits available to micro-businesses. It lowers the cost of entry for offering a vital employee benefit, helping you attract and retain the best talent without breaking the bank.