Small Business Health Care Tax Credit: A Guide for Employers

 

If you're a small business owner, you know how challenging it can be to offer health insurance to your employees while keeping costs under control. Fortunately, the Small Business Health Care Tax Credit is designed to ease this financial burden, helping eligible employers provide health coverage at a lower cost.

 

In this post, we'll break down what the Small Business Health Care Tax Credit is, who qualifies for it, how much you can save, and how to claim it.

 

What Is the Small Business Health Care Tax Credit?

 

The Small Business Health Care Tax Credit is a federal tax incentive that helps small businesses and tax-exempt organizations cover the cost of employee health insurance. This credit is aimed at businesses with low- to moderate-income employees and is available through the Small Business Health Options Program (SHOP) Marketplace.

 

The credit was introduced as part of the Affordable Care Act (ACA) to encourage small businesses to provide health coverage to their employees. It can cover up to 50% of premium costs for for-profit businesses and up to 35% for tax-exempt organizations.

 

Who Qualifies for the Credit?

 

To be eligible for the Small Business Health Care Tax Credit, your business must meet the following criteria:

 

1. Have fewer than 25 full-time equivalent (FTE) employees.

• Part-time workers are counted proportionally (e.g., two half-time employees equal one full-time employee).

 

2. Pay an average annual wage of less than $63,000 per FTE (for tax year 2024, indexed for inflation).

• The lower the average wage, the higher the credit your business may receive.

 

3. Pay at least 50% of the cost of employee-only health insurance coverage.

• You must contribute at least half of the premium cost for your employees (not including dependents or family members).

 

4. Purchase coverage through the SHOP Marketplace.

• The credit is only available if you buy your plan through a qualified SHOP provider.

 

How Much Can You Save?

 

The exact amount of credit your business qualifies for depends on the number of employees and their average wages. Here’s how it works:

 

Maximum credit:

• 50% of premiums paid for small businesses

• 35% of premiums paid for tax-exempt employers (such as nonprofits)

• The smaller your business and the lower your employees' wages, the higher the credit.

• If you don’t owe taxes, you can carry the credit forward to future tax years or back to previous ones.

 

Example Calculation:


Let’s say you run a small business with 10 employees, and their average annual wage is $40,000. You pay $50,000 per year in premiums for employee-only health coverage. If you qualify for the full 50% credit, you could receive a tax credit of $25,000, significantly reducing your costs.

 

How to Claim the Small Business Health Care Tax Credit

 

To claim the tax credit, follow these steps:

 

1. Enroll in a SHOP plan.

• You must purchase health insurance through the SHOP Marketplace in your state.

 

2. Complete IRS Form 8941.

• Use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate your credit.

 

3. File your business tax return.

• Apply the credit when filing your federal income tax return (for for-profit businesses) or Form 990-T (for tax-exempt employers).

 

4. Carry forward or back if needed.

• If your credit is larger than your tax liability, you can carry it forward or back to previous tax years to offset taxes owed.

 

Key Takeaways

 

• The Small Business Health Care Tax Credit helps businesses afford employee health coverage.

• Eligible employers can receive up to 50% of premium costs back as a tax credit.

• Businesses must meet requirements for size, wages, and contribution levels to qualify.

• The credit is available only through the SHOP Marketplace and must be claimed using IRS Form 8941.

 

If you’re a small business owner, taking advantage of this tax credit could make offering health insurance more affordable, helping you attract and retain top talent while keeping costs down.

 

By understanding and utilizing this tax credit, small businesses can make employee health benefits more affordable—helping both their teams and their bottom line.