Quick Answer
The Small Business Health Care Tax Credit provides up to 50% of health insurance premiums paid by qualifying small businesses with fewer than 25 full-time equivalent employees and average annual wages below $64,000 in 2026. Eligible businesses can claim this credit for up to 6 years, potentially saving tens of thousands in taxes.
Best Answer
Robert Kim, CPA
Best for business owners who provide health insurance to employees and want to maximize their tax credit
How the Small Business Health Care Tax Credit works
The Small Business Health Care Tax Credit is designed to make health insurance more affordable for small employers. According to IRS Form 8941, you can claim up to 50% of premiums you pay toward employees' health insurance coverage, making it one of the most valuable credits available to small businesses.
For 2026, the maximum credit applies to businesses with 10 or fewer full-time equivalent employees (FTEs) earning average wages of $32,000 or less. The credit phases out as you approach 25 FTEs or average wages of $64,000.
Detailed eligibility requirements
Employee count test: You must have fewer than 25 FTEs. Part-time employees count as fractions — two half-time employees equal one FTE. Seasonal workers working 120 days or fewer don't count.
Average wage test: Your average annual wages per FTE must be less than $64,000 for 2026 (adjusted annually for inflation). This includes wages subject to FICA taxes but excludes owner wages.
Premium payment test: You must pay at least 50% of the premium cost for employee-only coverage. You don't need to contribute to dependent coverage, but contributions count toward the credit calculation.
Example: Maximum credit calculation
ABC Company has 8 FTEs with average wages of $28,000 and pays $96,000 in qualifying health insurance premiums:
If ABC Company had 15 FTEs and $45,000 average wages instead, the credit would be reduced by the phase-out formulas to approximately $32,000.
Phase-out calculation details
Six-year limitation and tax-exempt organizations
For-profit businesses can claim this credit for up to 6 tax years. However, there's a strategic consideration: you get the maximum benefit by claiming it during your most profitable years when you need the largest tax reduction.
Tax-exempt organizations can claim up to 35% of premiums (instead of 50%) as a refundable credit against their payroll tax liability, making it particularly valuable since they typically don't owe income tax.
Qualifying health plan requirements
The insurance must be purchased through the Small Business Health Options Program (SHOP) Marketplace to qualify for the credit. According to the Affordable Care Act provisions, group health plans purchased outside the SHOP marketplace don't qualify, regardless of how generous the coverage.
Strategic planning considerations
Timing: Since you're limited to 6 years, consider when to start claiming the credit. If you're expecting rapid growth that might disqualify you, claim it early.
Wage management: If you're close to the $64,000 average wage threshold, consider profit-sharing bonuses instead of wage increases, as bonuses may not count toward the wage calculation.
Employee classification: Properly classify workers as employees vs. independent contractors, as only employee premiums qualify.
What you should do
Start by calculating your FTE count and average wages using IRS Form 8941 worksheets. If you qualify, ensure your health insurance is purchased through the SHOP marketplace. Our return-scanner can identify if you've been eligible in previous years but missed claiming the credit.
Key takeaway: Qualifying small businesses can save up to 50% of health insurance costs through this credit, potentially worth $20,000-$50,000 annually, but only if insurance is purchased through SHOP marketplace.
*Sources: [IRS Form 8941](https://www.irs.gov/forms-pubs/about-form-8941), [IRS Publication 535](https://www.irs.gov/pub/irs-pdf/p535.pdf)*
Key Takeaway: The Small Business Health Care Tax Credit provides up to 50% of health insurance premiums for businesses with under 25 FTEs and average wages below $64,000, but requires SHOP marketplace coverage.
Small Business Health Care Tax Credit rates by business size for 2026
| FTE Count | Average Wages | Credit Rate | Credit on $80k Premiums |
|---|---|---|---|
| 10 or fewer | ≤$32,000 | 50% | $40,000 |
| 15 FTEs | $40,000 | ~32% | $25,600 |
| 20 FTEs | $50,000 | ~18% | $14,400 |
| 24 FTEs | $60,000 | ~3% | $2,400 |
| 25+ FTEs | Any amount | 0% | $0 |
More Perspectives
Michelle Woodard, JD
Best for growing businesses that need to understand how the phase-out rules affect their credit amount
Navigating the phase-out rules as you grow
If your business is approaching the 25 FTE or $64,000 average wage limits, understanding the phase-out mechanics is crucial for tax planning. The credit doesn't disappear immediately — it reduces gradually, which creates planning opportunities.
Phase-out formula details
The credit phases out along two dimensions:
Both phase-outs apply simultaneously, so a business with 20 FTEs earning $50,000 average wages faces both reductions.
Strategic employee management
Consider part-time vs. full-time: Two employees working 20 hours each count as one FTE, while one employee working 40 hours also counts as one FTE. This flexibility allows you to structure your workforce to stay within limits.
Seasonal worker exemption: Workers employed 120 days or fewer don't count toward your FTE calculation. If you have seasonal peaks, structure these positions carefully.
Owner exclusion: Owners (more than 2% S-corp shareholders, partners, sole proprietors) and their family members don't count as employees for this credit, which can help businesses stay under the 25 FTE threshold.
Multi-year planning strategy
Since you're limited to 6 years total, timing matters. If you expect rapid growth, consider claiming the credit in earlier years when your rate is higher. The credit carries forward as part of the General Business Credit if you can't use it all in the current year.
Key takeaway
Businesses near the size limits should carefully manage FTE counts and wage levels to maximize credit benefits, potentially restructuring workforce composition to maintain eligibility.
*Sources: [IRC Section 45R](https://www.law.cornell.edu/uscode/text/26/45R)*
Key Takeaway: Growing businesses can strategically manage FTE counts and wage levels through part-time staffing and seasonal worker exemptions to maintain eligibility as they approach the 25 FTE/$64,000 average wage limits.
Michelle Woodard, JD
Best for nonprofits and other tax-exempt organizations that want to understand their version of this credit
How the credit works for tax-exempt organizations
Tax-exempt organizations get a modified version of this credit that's often more valuable than the for-profit version. You can claim up to 35% of qualifying health insurance premiums as a refundable credit against your payroll tax liability.
Why the refundable feature matters
Unlike for-profit businesses that can only reduce income tax liability, tax-exempt organizations receive actual refunds. If your Small Business Health Care Tax Credit exceeds your payroll taxes owed, the IRS sends you a check for the difference.
Example: A nonprofit with $60,000 in qualifying premiums claims a $21,000 credit (35% × $60,000). If they only owe $15,000 in payroll taxes, they receive a $6,000 refund.
Eligibility considerations for nonprofits
The same FTE and average wage rules apply, but there are additional considerations:
Unrelated business income: If you have substantial unrelated business income, you might benefit more from the for-profit version (50% vs. 35%).
Volunteer exclusion: True volunteers don't count as employees, but be careful with stipends or nominal payments that might create an employment relationship.
Minister housing allowances: These generally don't count toward average wage calculations.
Form filing requirements
Tax-exempt organizations claim this credit on Form 990-T, even if they don't otherwise need to file this form. This is different from for-profit businesses that use Form 8941.
Key takeaway
Tax-exempt organizations can receive actual cash refunds through the 35% health care tax credit, making it potentially more valuable than tax reductions for organizations with limited tax liability.
*Sources: [IRS Form 990-T Instructions](https://www.irs.gov/pub/irs-pdf/i990t.pdf)*
Key Takeaway: Tax-exempt organizations can claim a refundable 35% credit on health insurance premiums, potentially receiving actual cash refunds that exceed their payroll tax liability.
Sources
- IRS Form 8941 — Credit for Small Employer Health Insurance Premiums
- IRS Publication 535 — Business Expenses including health insurance
- IRC Section 45R — Employee health insurance expenses of small employers
Reviewed by Robert Kim, CPA on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.