Any company that’s offering employee benefits should get up to speed with the small business healthcare tax credit. That’s because if your business pays to offer health care insurance, this perk can offset some of your costs as long as you qualify. In fact, it can be worth up to half of the costs you pay for employee health care premiums.
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What you’ll learn
What you’ll learn
Key takeaways
- One of the most requested employee benefits is health insurance. While this can be a significant perk for employees, it is also a significant investment for businesses
- In 2024, businesses paid average annual healthcare premiums of nearly $9,000 for single coverage and more than $25,000 for family coverage for their employees, premiums increased by 6% for singles and 7% for families from the previous year
- To make these costs more manageable for your business, it’s smart to look into the health care tax credit for small businesses, a feature of the Affordable Care Act
In this employer’s guide, we discuss what the small business healthcare tax credit is, which small businesses can take advantage of it, and the steps to get started.
Small business healthcare tax credit eligibility requirements
Naturally, there are several eligibility requirements for the small business healthcare tax credit for 2026 and beyond. These are as follows:
- Qualifying employers: Employers that qualify must offer a qualified health plan through a Small Business Health Options Program (SHOP) Marketplace and contribute at least 50% of the cost of employee healthcare coverage. If your small business is located outside of the United States, but does business in the US and meets the other requirements, it will qualify for the tax credit.
- Full-time equivalent (FTE) employees: If your business has fewer than 25 full-time equivalent employees, it may qualify.
- Annual average wages: You must pay out an average employee salary of $65,000 or less per year.
You can also use this quick reference table to see if your business might qualify for the savings.
| Requirement | Details for 2026 |
|---|---|
| Maximum credit percentage | Up to 50% of premiums paid (35% for tax-exempt employers). |
| Employee limits | Must have fewer than 25 full-time equivalent (FTE) employees. |
| Average salary limits | Average employee salary must be $65,000 or less per year. |
| Employer contribution | You must pay at least 50% of the cost of single coverage for each employee. |
| Plan type | Must offer a qualified health plan through a Small Business Health Options Program (SHOP). |
This sliding-scale healthcare tax credit is based on company size. The bigger your company, the smaller your potential tax credit. Additionally, the credit is available for two consecutive tax years. The maximum small business healthcare tax credit is 50% of premiums paid (35% for tax-exempt employers).
How to calculate the credit
You can use the tax credit estimator to determine if your small business is eligible. Once you have determined your eligibility, use Form 8941 to calculate your company’s actual tax credit.
- Understanding taxable income limits: The small business healthcare tax credit is highest for businesses with fewer than 10 employees with salaries that average $27,000 or less. Once employee salaries average $65,000 or higher, the credit no longer applies.
- Employee number considerations: Small is mighty when it comes to this tax credit. You receive a higher credit for fewer employees. For instance, you will get a bigger credit if your company has 10 employees than if it has 25. When it comes to calculating the credit, one full-time employee is equivalent to 2,080 work hours per year.
To see how the numbers come together, we asked Tom Brock, a licensed CPA and CFA charterholder, to run through an example of how the tax credit calculation works. The following sample scenario is for a small business with 10 employees, and the employer has chosen to cover half of their health insurance coverage.
“Five employees elect the single plan option, and each has a premium of $4,000 (for a total of $20,000). Five employees elect the family plan option, and each has a premium of $10,000 (for a total of $50,000). Collectively, the total premium paid equals $70,000.
Because you paid half, or $35,000, of those premiums, you are eligible for a tax credit of $17,500. Moreover, even if your small business does not owe tax during the tax year, you are able to carry the credit back or forward to other tax years.”
— Tom Brock, CPA, CFA
Now that you see how valuable this credit can be for your company, how do you apply for it?
Forms and documentation
In order to receive the small business health care tax credit, businesses need to submit Form 8941 and pertinent supporting documentation.
Overview of Form 8941
Form 8941, also known as the Credit for Small Employer Health Insurance Premiums form from the IRS, is a one-page form that ensures a small business pays for employee health insurance via the SHOP Marketplace. It requests the Employer Identification Number you use to report employment taxes. It also facilitates the calculation of your number of employees, annual average wages, premiums paid, and more to determine the amount of the small business tax credit you can claim.
If you are wondering exactly what tax form 8941 requires, here’s a checklist of the information you need to gather before filling it out:
- Your exact Employer Identification Number (EIN).
- The total number of full-time equivalent (FTE) employees for the tax year.
- The total average annual wages paid to these employees.
- Documentation of the premiums paid for employee health insurance coverage.
- Proof of enrollment in a qualifying SHOP Marketplace plan.
Necessary supporting documents
In addition to Form 8941, the IRS may ask for supporting documents related to your employee count or annual average salaries.
Tax-exempt small businesses must also complete IRS Form 990-T for the tax credit.
Benefits of the Small Business Health Options Program (SHOP)
As outlined below, the Small Business Health Options Program (SHOP) offers several notable benefits for small businesses.
- The ability to better manage healthcare coverage for your employees as well as your contributions for premiums
- The ability to select from a variety of health insurance plans and update plans as needed — including the option to offer health and dental coverage, collectively or individually
- The flexibility to start your company plan at any time
And of course, the small business healthcare tax credit is another great incentive for enrolling in a SHOP plan!
Healthcare tax credits can make a difference
Offering your employees access to healthcare can have positives for your entire organization. Staffers can take solace in knowing they have options should they or their family members end up under the weather. Employers can use the coverage to enhance recruiting efforts and improve employee retention. To top it all off, small businesses can even get part of their health insurance investment back by applying for the small business healthcare tax credit.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.