Small Business Health Care Tax Credit: Who Qualifies and How

The Small Business Health Care Tax Credit is a federal tax credit for very small employers that buy health coverage for their workers through the Small Business Health Options Program (SHOP). It can be worth a meaningful share of what you pay in premiums, but it is narrow: it phases out quickly as a business grows, it applies only to SHOP coverage in most cases, and it lasts for just two consecutive tax years.

This guide explains who qualifies, how the credit shrinks, how it is claimed and the special situations that trip people up. Dollar thresholds change every year, so the figures below are tied to the IRS's 2025 instructions for Form 8941, the version posted on IRS.gov in October 2026. This is general information, not tax advice; a qualified tax professional can apply the rules to your numbers.

What the credit is worth

According to the IRS's 2025 Instructions for Form 8941, the maximum credit is 50% of the premiums an eligible small employer pays, and 35% for tax-exempt employers. For tax years beginning after 2013, the credit is available only for a two-consecutive-tax-year credit period, which starts with the first year you claim it.

The maximum is a ceiling, not a typical result. The same instructions say the credit may be reduced by limits based on your number of full-time equivalent employees, your average annual wages, average premiums in your area and any state premium subsidies or credits.

The three eligibility tests

The 2025 instructions say you are an eligible small employer for the tax year if you meet three requirements.

1. A qualifying arrangement. You paid premiums under an arrangement that generally requires you to pay a uniform percentage, not less than 50%, of the premium for each enrolled employee's coverage. The instructions add special rules for composite billing and list billing.
2. Fewer than 25 FTEs. You had fewer than 25 full-time equivalent employees for the tax year. Because of how the phaseout works, the instructions note that an employer with exactly 25 FTEs is not eligible.
3. Average wages under the limit. For tax year 2025, you paid average annual wages of less than $67,000 per FTE. The IRS adjusts this figure for inflation each year; its credit page lists earlier amounts, such as $62,000 for tax year 2023.

On top of these, the coverage must generally be a qualified health plan offered through SHOP. HealthCare.gov says enrolling in a SHOP plan is generally the only way for a small business or nonprofit to claim the credit, and that proof of SHOP eligibility may be required when you claim it.

Counting FTEs and wages

The FTE count for this credit is not the same as for other Affordable Care Act rules. The IRS explains that one FTE generally equals 2,080 hours a year, that hours above 2,080 for any one employee are excluded, and that part-time hours are combined, so two half-time employees count as one FTE. The 2025 instructions give an example: an employer with 48 half-time employees has 24 FTEs and can claim the credit.

Some people are left out of the count. The IRS lists owners of sole proprietorships, partners, more-than-2% shareholders of S corporations, more-than-5% owners, and family members of these owners. Their hours and wages don't count toward FTEs or average wages, and premiums paid for them don't count toward the credit. Seasonal workers who work 120 or fewer days a year are excluded from FTEs and average wages, although the premiums you pay for them can still count.

Average annual wages are total wages divided by FTEs. If you own more than one business, the instructions say related businesses, such as members of a controlled group or businesses under common control, are treated as a single employer, so you count them together.

How the credit phases down

The credit is largest for the smallest, lowest-wage employers. The 2025 instructions say that if you had more than 10 FTEs and average annual wages of more than $33,000, the FTE and wage limits will separately reduce your credit, which may reduce it to zero even if you meet the basic tests. The wage limit reaches zero at average annual wages of $67,000 or more for tax year 2025.

There is also a premium cap. The instructions explain that the credit is reduced if your premiums are higher than they would have been with a plan priced at the average premium for the small group market in your rating area. The IRS publishes those average premiums with the instructions.

For example, imagine a hypothetical bakery with six FTEs, modest wages and a SHOP plan for which it pays 60% of each employee's premium. With 10 or fewer FTEs, the FTE phaseout doesn't reduce its credit; whether the wage phaseout does depends on its average wages. A hypothetical 20-FTE firm paying higher wages could qualify on paper yet see its credit reduced sharply, or to nothing, by the phaseouts. The worksheets in the instructions are the only way to know your figure.

How to claim it

The IRS explains that you figure the credit on Form 8941, Credit for Small Employer Health Insurance Premiums.

• Taxable businesses claim it as part of the general business credit on Form 3800. The IRS says the credit can be carried back or forward if you don't owe tax that year.
• Tax-exempt employers described in section 501(c) claim a refundable credit on Form 990-T, limited to certain payroll taxes, and must file Form 990-T to claim it even if they don't normally file one.
• Partnerships and S corporations file Form 8941 and pass the credit through to owners.

Two follow-on rules matter for budgeting. The instructions say you must reduce your deduction for employee health insurance premiums by the amount of the credit. And the IRS's credit page (updated October 1, 2026) notes that if you qualified for an earlier year but didn't claim the credit, you may be able to file an amended return, generally within three years from when the return was filed or two years from when the tax was paid, whichever is later.

Special situations

• No SHOP plans in your county. The 2025 instructions note that some counties have no SHOP plans, and that IRS Notice 2018-27 provides relief allowing employers with a principal business address in those counties to claim the credit for 2025 if they properly claimed it for all or part of 2024. HealthCare.gov's SHOP plans and prices tool shows what is available in a county.
• Hawaii. The instructions say employers in Hawaii can't claim the credit for premiums paid for plan years beginning after 2016, because of the state's waiver.
• The two-year clock. Because the credit period is two consecutive tax years from the first claim, time your first claim carefully and plan for the year your credit ends.

Getting it right

This credit rewards careful records: employee hours, wages, premiums paid, your SHOP eligibility results and the plan you bought. If your situation is close to any of the limits, a tax professional can run the worksheets with you. The Taxpayer Advocate Service's Small Business Tax Credit Estimator, linked from the IRS credit page, is another place to start. For background on SHOP itself, see our guide The SHOP Marketplace: Eligibility, Enrollment and Renewal.

Key takeaways

• The IRS's 2025 instructions put the maximum credit at 50% of premiums paid, or 35% for tax-exempt employers, for two consecutive tax years.
• For tax year 2025, you need fewer than 25 FTEs, average annual wages under $67,000 and a uniform contribution of at least 50% of premiums.
• Coverage generally must be bought through SHOP, with narrow IRS relief for some counties without SHOP plans.
• The credit shrinks above 10 FTEs and, for 2025, above $33,000 in average wages, and can reach zero.
• Claim it on Form 8941, reduce your premium deduction by the credit, and check the current year's instructions before filing.

Sources

• Internal Revenue Service, Instructions for Form 8941 (2025)
• Internal Revenue Service, Small Business Health Care Tax Credit and the SHOP Marketplace (updated October 1, 2026)
• HealthCare.gov, The Small Business Health Care Tax Credit
• HealthCare.gov, How to offer SHOP health insurance to your employees