The Small Business Health Care Tax Credit

What the credit is

The Small Business Health Care Tax Credit is a federal tax credit that reimburses small employers for part of what they spend on employees’ health coverage — up to 50% of premium contributions for a for-profit business (35% for tax-exempt organizations). It’s a credit, not a deduction, so it reduces your tax bill dollar-for-dollar — and you can still deduct the premium costs above the credit.

Who qualifies

Four conditions. You must have fewer than 25 full-time-equivalent employees; your employees’ average annual wages must be below a threshold the IRS indexes each year (around $65,000 for 2026); you must pay a uniform amount equal to at least 50% of the employee-only premium for each enrolled employee; and you must buy the coverage through a SHOP-certified plan (with a narrow exception for areas where no SHOP plans are available). For this credit, a full-time-equivalent is defined as 2,080 hours a year, and you don’t count owners or their family members.

How much it’s worth

The credit is on a sliding scale: the smaller and lower-paid your workforce, the bigger it is. The full credit goes to employers with 10 or fewer FTEs and average wages at the low end (around $33,000 or less), and it phases down from there as your headcount approaches 25 or your average wage approaches the ceiling. One more limit: the credit is capped by the average small-group premium in your area, so if you pay more than that average, the credit is figured on the average, not your actual spend.

How to claim it

You claim the credit on IRS Form 8941, filed with your business return (tax-exempt employers use Form 990-T, where the credit is refundable up to payroll taxes). If you don’t owe enough tax to use it in a given year, you can generally carry it back or forward. Because the calculation hinges on FTE counts and average wages, many employers have their accountant or payroll provider run it.

The catches

Two limits keep this from being a long-term subsidy. First, it’s only available for two consecutive tax years — after that, it’s gone. Second, the SHOP requirement is real: with SHOP plans scarce in much of the country, some otherwise-eligible employers can’t easily find a qualifying plan (which is why the IRS created the no-SHOP-available exception). So treat the credit as a helpful two-year boost for a genuinely small, lower-wage team — not a permanent reason to choose group coverage.

The bottom line

If you have fewer than 25 employees, pay below-average wages, cover at least half the premium, and can enroll in a SHOP plan, the Small Business Health Care Tax Credit can hand back up to half your contributions for two years. It’s narrow and temporary, but real money for the businesses it fits. Confirm your eligibility and run the numbers with a tax professional. This is general information, not tax advice.