The small business health care tax credit is worth up to 50 percent of the premiums an employer pays toward employee health coverage, under Internal Revenue Code Section 45R. For tax years beginning in 2026, you qualify if you have fewer than 25 full-time equivalent employees, pay average annual wages below $68,200, cover at least half of each enrolled employee’s single-coverage premium, and buy the plan through the Small Business Health Options Program (SHOP) Marketplace. The credit is only available for two consecutive tax years, so the timing of when you first claim it matters as much as whether you qualify.
The Four Eligibility Conditions
All four of these must be true for the tax year you’re claiming:
- Fewer than 25 full-time equivalent employees.
- Average annual wages under $68,200 for 2026. That figure is twice the inflation-adjusted base amount of $34,100.1Internal Revenue Service. Internal Revenue Bulletin: 2025-45 – Rev. Proc. 2025-32
- You pay at least 50 percent of the single-coverage premium for every enrolled employee, at a uniform percentage.2Office of the Law Revision Counsel. 26 USC 45R – Employee Health Insurance Expenses of Small Employers
- The coverage is purchased through the SHOP Marketplace.3HealthCare.gov. The Small Business Health Care Tax Credit
The 50 percent contribution floor is measured against single coverage even if you offer a family plan. If your family-plan contribution equals at least half of what single coverage would cost, you clear the bar.
Who Doesn’t Count on Your Payroll
The FTE and wage calculations don’t include everyone you pay. The statute pulls certain owners and their relatives out of both the headcount and the wage average so businesses can’t reshape their numbers to qualify.
The following are excluded from both counts, and premiums paid on their behalf don’t count toward the credit either:4Internal Revenue Service. Notice 2010-44 – Tax Credit for Employee Health Insurance Expenses of Small Employers
- Sole proprietors and their spouses.
- Partners in a partnership.
- S corporation shareholders who own more than 2 percent of the stock.
- Owners of more than 5 percent of any other business type.
- Family members of any of the above, including children, siblings, parents, in-laws, aunts, uncles, nieces, and nephews.
- Household dependents of anyone in the excluded group.
A family-run restaurant with two owner-spouses and several relatives on staff may find that most of the payroll doesn’t count, which can make the credit smaller than expected or push the business out of eligibility entirely.
Seasonal workers follow their own rule. Their hours and wages are excluded unless they work more than 120 days during the tax year, in which case everything they earned gets counted.5Office of the Law Revision Counsel. 26 U.S. Code 45R – Employee Health Insurance Expenses of Small Employers A seasonal worker for this purpose is someone performing seasonal labor as defined by the Department of Labor, including agricultural workers and retail employees hired only for a holiday season.
How Much the Credit Is Worth
Taxable businesses can get a credit of up to 50 percent of their premium contributions. Tax-exempt organizations top out at 35 percent.2Office of the Law Revision Counsel. 26 USC 45R – Employee Health Insurance Expenses of Small Employers Those percentages apply only to the employer’s share of premiums, not to the total premium including whatever employees pay in. For tax-exempt employers, the credit is also capped at the organization’s payroll tax liability for the calendar year.6eCFR. 26 CFR 1.45R-3 – Calculating the Credit
Where the Phaseouts Kick In
The full credit percentage is only for employers with 10 or fewer FTEs and average wages at or below $34,100 for 2026. Above either threshold, two separate reductions apply, and they stack:2Office of the Law Revision Counsel. 26 USC 45R – Employee Health Insurance Expenses of Small Employers
- Employee reduction: the credit shrinks by (FTEs above 10) divided by 15. At 25 FTEs the credit is zero.
- Wage reduction: the credit shrinks by (average wages above $34,100) divided by $34,100. At $68,200 the credit is zero.1Internal Revenue Service. Internal Revenue Bulletin: 2025-45 – Rev. Proc. 2025-32
An employer sitting in the middle of both ranges (say, 18 FTEs and $51,000 in average wages) will lose most of the credit because both reductions apply.
Two Consecutive Years, and That’s It
The credit is available for only two consecutive tax years. The clock starts the first year you offer a qualified SHOP plan to employees. After that two-year window closes, the credit is gone even if you keep providing coverage.5Office of the Law Revision Counsel. 26 U.S. Code 45R – Employee Health Insurance Expenses of Small Employers
Calculating FTEs and Average Wages
An FTE isn’t a headcount. Add up all hours worked by every non-excluded employee during the year and divide by 2,080. No individual employee contributes more than 2,080 hours even if they worked overtime. Five employees who each worked 1,040 hours equal 2.5 FTEs, not five.
Average annual wages are total wages paid to non-excluded employees, divided by FTEs, rounded down to the nearest $1,000. That rounding sometimes drops an employer just under a phaseout threshold, so precise math is worth the effort.
The SHOP Requirement Is Where Employers Get Tripped Up
The credit only applies to coverage bought through the SHOP Marketplace. Premiums paid for plans outside the Exchange generate no Section 45R credit for tax years beginning after 2013.2Office of the Law Revision Counsel. 26 USC 45R – Employee Health Insurance Expenses of Small Employers Form 8941 asks directly whether premiums were paid through SHOP, and if the answer is no, the form ends there.7Internal Revenue Service. Form 8941 – Credit for Small Employer Health Insurance Premiums
The federal SHOP Marketplace no longer offers direct online enrollment in most states. HealthCare.gov points employers to insurance companies directly or to SHOP-registered agents and brokers.8HealthCare.gov. SHOP Health Insurance Overview Some state-run exchanges keep their own SHOP programs with different plan availability. Confirm your policy actually qualifies as a SHOP plan before building the credit into your tax planning. This is the single most common reason the credit gets denied on audit.
Filing the Credit and What It Does to Your Deduction
Everyone starts with Form 8941, Credit for Small Employer Health Insurance Premiums, which walks through the FTE count, average wages, premium totals, and phaseout math.9Internal Revenue Service. About Form 8941, Credit for Small Employer Health Insurance Premiums From there:
- Taxable businesses carry the credit to Form 3800, General Business Credit, and attach it to their income tax return (Form 1120 for C-corporations, Form 1040 for sole proprietors and single-member LLCs).10Internal Revenue Service. Instructions for Form 8941
- Tax-exempt organizations claim it as a refundable credit on Form 990-T. They can get a refund even if they owe no income tax, though the refund can’t exceed their payroll tax liability.10Internal Revenue Service. Instructions for Form 8941
Keep payroll registers, time records, and monthly premium invoices ready. The IRS can request documentation for any line on Form 8941.
Claiming the credit reduces the health insurance premium deduction you’d otherwise take as a business expense. You can’t get the full deduction and the full credit on the same dollars.11Office of the Law Revision Counsel. 26 U.S. Code 280C – Certain Expenses for Which Credits Are Allowable The credit is almost always the better deal, because a credit cuts your tax bill dollar for dollar while a deduction only shrinks taxable income. In the 21 percent corporate bracket, $1,000 of deduction saves $210; $1,000 of credit saves $1,000. Have your preparer run both to confirm on your numbers.