Who Qualifies for the Small Business Health Care Tax Credit in 2026?

You generally qualify if you have fewer than 25 full-time equivalent employees, pay average annual wages under the IRS limit, buy employee coverage through a SHOP Marketplace plan, and pay at least 50% of the premium cost. The credit is up to 50% of the premiums you pay (35% for tax-exempt employers), and you can claim it for only two consecutive tax years.

50%To qualify, you need fewer than 25 full-time equivalent employees (FTEs), average annual wages below the IRS limit, a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace, and an arrangement where you pay at least 50% of the premium cost.
35%The maximum credit is 50% of premiums paid for small businesses and 35% for small tax-exempt employers.
$67,000For tax year 2025, average annual wages must be less than $67,000 per FTE.

The small business health care tax credit (section 45R) helps small employers that pay for their workers' health insurance. To qualify, you need fewer than 25 full-time equivalent employees (FTEs), average annual wages below the IRS limit, a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace, and an arrangement where you pay at least 50% of the premium cost. The maximum credit is 50% of premiums paid for small businesses and 35% for small tax-exempt employers. The IRS adjusts the wage limit for inflation each year. For tax year 2025, average annual wages must be less than $67,000 per FTE.

Last checked: November 3, 2026. This page explains the rules only. It is general information, not legal, tax, or financial advice.

The short version

The credit is claimed on Form 8941, Credit for Small Employer Health Insurance Premiums.
It's available for a 2-consecutive-tax-year credit period, starting with the first year you claim it.
It works on a sliding scale: the smaller the employer and the lower the average wage, the bigger the credit.
If you had more than 10 FTEs or paid higher average wages, the credit is reduced and may drop to zero.
Coverage generally has to be bought through a SHOP Marketplace. HealthCare.gov says enrolling in a SHOP plan is generally the only way to claim the credit.
You can still deduct the premiums you pay above the credit amount as a business expense.

Who qualifies

Employers with fewer than 25 FTEs for the tax year. You can meet this even with 25 or more employees: the IRS example is 48 half-time employees, which count as 24 FTEs. An employer with exactly 25 FTEs isn't eligible because of how the phaseout works.
Employers whose average annual wages per FTE are below that year's IRS limit.
Employers that offer a qualified health plan through a SHOP Marketplace, or that fit a limited exception.
Employers that pay a uniform percentage (not less than half) of the premium cost for each enrolled employee's coverage.
Tax-exempt employers described in section 501(c). A tax-exempt employer not described in section 501(c) is generally not eligible.
Not eligible: employers in Hawaii, for health plan years beginning after 2016, because of Hawaii's state innovation waiver.

Who doesn't count as an employee

When you count FTEs and average wages, the IRS says to leave out:

The owner of a sole proprietorship
A partner in a partnership
A shareholder owning more than 2 percent of an S corporation
An owner of more than 5 percent of the business
Family members of the people above

Premiums you pay for these people also don't count toward the credit. Seasonal employees who work 120 or fewer days a year are left out of the FTE and wage counts, but premiums you pay for them can still count.

How to get it

How to get started

Count your FTEs. Add up the hours of service for which you paid wages (no more than 2,080 hours for any one employee) and divide by 2,080. Round down to a whole number.
Figure your average annual wage: total wages paid to employees divided by your FTEs.
Check that your plan is offered through a SHOP Marketplace. You can shop plans at HealthCare.gov or call the SHOP Call Center at 1-800-706-7893.
Confirm you pay a uniform percentage (not less than half) of each enrolled employee's premium.
Complete Form 8941 using its worksheets. Small businesses report the credit as part of the general business credit on Form 3800. Tax-exempt employers claim it on Form 990-T, even if they don't usually file that form.
Missed a year? The IRS says you can file an amended return. A refund claim generally must be filed within three years from the time the return was filed or two years from the time the tax was paid, whichever is later.

Programs that may match

Look beyond the health care credit

See all the tax credits and incentives your business may qualify for.Retirement plans also come with tax breaks for small employerssee retirement plan tax benefits for small business owners.See what the 2025 tax law changed for small businesses.Find other programs you may qualify for with FundPlenty's free match at fundplenty.com.

FAQ

How much is the small business health care tax credit?

Up to 50% of the premiums a small business pays, or up to 35% for a small tax-exempt employer. The credit is reduced if you had more than 10 FTEs or paid average annual wages above the phaseout amount. HealthCare.gov's example: an employer with 10 employees averaging $25,000 in wages that contributes $70,000 toward premiums would get a $35,000 credit.

What is the wage limit for 2026?

For tax years beginning in 2026, the IRS set the dollar amount used for this credit at $34,100 (Revenue Procedure 2025-32). The law uses that amount to reduce the credit and sets the eligibility limit at twice that amount. For 2025, the Form 8941 instructions say average annual wages must be less than $67,000 per FTE, and the credit starts shrinking above $33,000.

How many years can I claim the credit?

Two consecutive tax years. For tax years beginning after 2013, the credit period starts with the first year you file Form 8941 claiming a credit.

Do I have to buy insurance through the SHOP Marketplace?

Generally, yes. For calendar year 2025, the IRS gives relief to eligible small employers in certain counties where SHOP had no plans available, if they properly claimed the credit for all or part of 2024 (Notice 2018-27).

Can a business that owes no tax still benefit?

Yes. The IRS says you can carry the credit back or forward to other tax years. For tax-exempt employers the credit is refundable, limited to the amount of certain payroll taxes paid.

Can I count part-time employees?

Yes. Their hours are combined into FTEs. Two half-time employees count as one FTE, and 20 half-time employees count as 10 FTEs.