active Federal Tax Credit

Small Business Health Care Tax Credit (Section 45R)

Internal Revenue Service

Up to 50% of premiums paid

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The short version

50% credit on small business health insurance

A federal tax credit for small employers who pay at least 50% of employee health insurance premiums. The maximum credit is 50% of premiums paid (35% for tax-exempt nonprofits). To qualify, the employer must have ≤25 full-time equivalent employees with average wages below $66,600/yr (inflation-adjusted; verify current-year threshold from Form 8941 instructions), purchase coverage through the SHOP Marketplace (healthcare.gov/small-businesses), and pay at least 50% of employee-only premium costs. The credit phases out as employee count rises from 10 to 25 and as average wages rise above $33,300/yr (inflation-adjusted; 2025 approximate). It's most valuable for businesses under 10 FTEs with lower-wage workforces.

Funding type: Tax Credit
Level: Federal
Amount: Maximum credit: 50% of qualified health insurance premiums paid (35% for tax-exempt small employers). Full credit available for employers with ≤10 FTE and average annual wages ≤$33,300 (inflation-adjusted; 2025 approximate — verify current-year threshold from IRS Form 8941 instructions). Phases out linearly as FTE count rises from 10 to 25 and as average wages rise from $33,300 to $66,600. Above 25 FTE or above $66,600 avg wage: no credit. Must purchase coverage through SHOP Marketplace.
Realistic amount: An 8-FTE restaurant paying $4,000/yr per employee in health premiums ($32,000 total) with average wages of $35,000: phas…
Deadline: Ongoing — claimed annually on federal income tax return (Form 8941). No expiration. Requires purchasing coverage through SHOP Marketplace each year the credit is claimed.
Status: active
States: Nationwide
Payment model: tax offset

Who qualifies

Must have fewer than 25 full-time equivalent (FTE) employees for the tax year — FTE counted by dividing total hours worked by all employees by 2,080
Average annual wages of FTE employees must be less than $66,600 (inflation-adjusted 2025 approximate — verify current-year threshold from IRS Form 8941 instructions; statutory base at enactment was $50,000)
Employer must pay at least 50% of the premium cost of employee-only (self-only) coverage for each enrolled employee
Must purchase health insurance through the SHOP Marketplace (healthcare.gov for small businesses or state exchange equivalent) — coverage obtained outside SHOP does not qualify
Qualifying employers: small businesses (for-profit) and tax-exempt §501(c) organizations
Employees excluded from FTE count: owners (>2% S-corp shareholders, partners, sole proprietors), family members of owners, and seasonal workers (if working <120 days/yr)
Credit is available for any 2 tax years only — the 2 years do NOT need to be consecutive calendar years; they must be the 2 years for which the employer claims the credit (after exhausting both claim years, no additional credit even if employer continues to qualify — this is the major limitation most advisors don't flag)

Hard requirements

Max 25 employees

What it covers

Eligible expenses

Employer-paid health insurance premiums for coverage purchased through SHOP Marketplace
Employee-only (self-only) premium tier — the 50% test applies to this tier
Dental and vision coverage purchased through SHOP if offered as part of the package
Premiums paid for all enrolled qualifying employees (excluding owner-employees and family members)

Ineligible expenses

Premiums for health coverage purchased outside the SHOP Marketplace
Premiums for owners, partners, >2% S-corp shareholders, and their family members
Coverage for seasonal employees working fewer than 120 days/year
Self-insured (ERISA self-funded) health plans
Health reimbursement arrangements (HRAs) in lieu of group coverage

How to apply

1

Calculate FTE count and average annual wages

Add up total hours worked by ALL employees (excluding owners, owner family members, partners, and seasonal workers <120 days). Divide by 2,080 to get FTE count. Calculate average annual wages by dividing total wages paid (excluding owners and owner family) by FTE count. Verify FTE < 25 and average wages < $66,600 (inflation-adjusted 2025 approximate — verify current-year threshold from IRS Form 8941 instructions).

~3 hrs
2

Enroll in SHOP Marketplace plan

Purchase qualifying health insurance through the SHOP (Small Business Health Options Program) Marketplace at healthcare.gov/small-businesses. Coverage must be SHOP-sourced — non-SHOP plans (even comparable ACA-compliant plans purchased directly from insurers) do not generate the credit. If already enrolled in a non-SHOP plan, transition at your next renewal.

~4 hrs
3

Confirm employer contribution meets 50% threshold

Verify the employer is paying at least 50% of the employee-only (self-only) premium for each enrolled employee. Family/dependent coverage does not need to meet the 50% test — only the employee-only tier. Employer can pay more, but 50% is the floor for the credit.

~1 hrs
4

Calculate credit on Form 8941

Complete IRS Form 8941 (Credit for Small Employer Health Insurance Premiums). Apply the phase-out reductions for FTE count between 10–25 and average wages between $33,300–$66,600 (inflation-adjusted 2025 approximates — verify current-year thresholds from Form 8941 instructions). The credit is the LESSER of: (a) the applicable percentage × premiums paid, or (b) the applicable percentage × average SHOP premium for equivalent coverage in your state. File Form 8941 with your return; flow through Form 3800 for for-profit entities.

~3 hrs

Insider tip

The 2-tax-year limit is the credit's most misunderstood feature — and a common source of confusion: the 2 years do NOT need to be consecutive calendar years. An employer could claim in 2022 and 2025, skipping years in between. After exhausting both claim years, you lose access permanently. Coordinate with a CPA on timing: ideally claim during the 2 years with the highest income tax liability for maximum benefit.

Deadline & timing

The credit has been available since tax year 2010. It was initially available without the SHOP Marketplace requirement; starting 2014, all employers must purchase through SHOP to claim the credit in subsequent years (2-year phase was transition). Small businesses can enroll in SHOP plans during open enrollment or with a qualifying life event. Tax-exempt employers (nonprofits) claim a 35% credit and receive it as a refundable credit — one of the few refundable options for nonprofits without elective pay.

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Last reviewed 2026. GrantCompass is an independent funding-discovery tool and is not affiliated with any government agency. Always confirm details on the official program page.