Small Business Health Care Tax Credit Under Section 45R
A small employer that pays part of its employees’ health premiums through a Marketplace plan may qualify for a tax credit. The eligibility tests are narrow, and the credit lasts only two years.
The Tests an Employer Must Meet
The credit is claimed on Form 8941. Each test is strict, and an employer that misses one by a small margin receives nothing.
Fewer Than 25 FTEs
The employer must have fewer than 25 full-time equivalent employees for the tax year. An employer with exactly 25 is not eligible. FTEs are not the same as headcount, so an employer with many part-time workers may still qualify. A tax professional can confirm the count using the IRS method for your tax year.
Average Annual Wages
Average annual wages must be below a threshold. For tax years beginning in 2025 the IRS instructions use less than $67,000 per FTE. Check the current instructions for the year you file. Wages are averaged across the employees counted, not taken from a single payroll line. Make sure the figure is computed the way the IRS instructions require, and keep your payroll records organized for review.
Credit Reduction
The credit begins to phase down when average wages exceed $33,000 and reaches zero at the wage limit, according to the Form 8941 worksheet for 2025. Because the wage and size reductions work together, the credit can be smaller than the headline percentage suggests. Ask your tax professional to run the worksheet with your own numbers before building it into your budget.
Uniform Contribution
The employer must pay a uniform percentage of the premium for each enrolled employee, and that percentage must be at least 50 percent. That means an employer cannot give richer premium help to some employees than to others and still count on the credit. Confirm with your tax adviser how your contribution design meets the rule.
Owners Do Not Count
Sole proprietors and certain family members of excluded owners are not counted as employees. Their hours, wages, and premiums are left out of the credit calculation. Rules about who is treated as an owner or relative can be technical. Review your ownership and family relationships with your tax adviser before assuming someone is counted or left out.
SHOP Coverage
Premiums generally must be paid for coverage through a SHOP Marketplace, or through direct enrollment where a state offers it, with limited exceptions listed in the IRS instructions. Coverage purchased outside the Marketplace may not count, apart from the exceptions the IRS describes. Ask your tax adviser and your broker to confirm that the plan you choose is eligible before you buy it.
How Much the Credit Is Worth and for How Long
The credit is a percentage of the premiums the employer pays. It does not carry forward beyond its two-year window.
For-Profit Employers
The maximum credit is 50 percent of the premiums the employer pays, subject to the wage and size reductions. The credit is based on premiums the employer actually pays, so the contribution you set matters. Your tax adviser can show how different contribution levels would change the net result.
Tax-Exempt Employers
Tax-exempt eligible small employers can receive a maximum credit of 35 percent of premiums paid. The rules for tax-exempt employers differ in how the credit is claimed, so a tax professional with exempt organization experience should review the details. Do not assume the credit works the same as for taxable employers.
Two Consecutive Years
The credit is available for a two-consecutive-tax-year period that begins with the first year the employer qualifies. The two-year period runs consecutively, so a year in which the employer does not qualify can use up part of the window. Plan the timing of enrollment with your tax adviser before the first year begins.
Reductions Add Up
Having more employees or higher average wages shrinks the credit. A business near either limit may see a small amount. A raise or a new hire can move the numbers in both directions at once. Model the credit under a few staffing and pay scenarios with your tax professional before making decisions based on it.
Filing the Form
The credit is figured on Form 8941 and then carried to the employer’s return. Tax-exempt employers have separate refundability rules. Keep premium receipts, proof of payment, and FTE and wage calculations in one file. Your tax professional will need them, and they make it easier to answer any later question from the IRS.
Use a Tax Advisor
Premium deductions, payroll records, and the FTE count all matter. A tax professional should compute and file the credit. This page is general information, not tax advice. Share the details of your plan, payroll, and ownership with a qualified tax professional before relying on the credit in your budget or your filing.
Planning Around the Credit
Because the credit lasts two years and requires a Marketplace plan, it should be weighed against the plan an employer would otherwise buy.
Compare Total Cost
Compare the net cost of a SHOP plan after the credit with a group plan sold directly by carriers, over the full period, not just the first year. A credit that looks attractive for two years may leave a bigger gap afterward. Ask for the premiums, the expected credit, and the renewal outlook side by side, so the comparison covers the whole period.
Plan for Year Three
After the credit ends, the employer pays the full cost. Know the renewal cost and options before enrolling. Ask your broker what a typical renewal could look like for the plan you are considering, and whether the plan or its network might change. Then decide whether the budget can absorb the full premium.
Count FTEs Carefully
FTEs are figured from hours worked. Part-time and seasonal employees change the count, so test the numbers before open enrollment. Seasonal staff and varying schedules can move the count from year to year. Run the calculation on actual hours worked, document the method you used, and ask your tax professional to confirm it.
Ask Your Broker
Licensed insurance brokers can compare SHOP and off-Marketplace group options and help you model the net cost. We can help line up the quotes and the benefit design, while your tax professional handles the credit calculation. Together they give a clearer picture of cost than either one would alone.
Small Business Tax Credit Questions
What is the Section 45R credit?
A tax credit for small employers that pay part of employees’ health insurance premiums. It is claimed on Form 8941.
How many employees can the employer have?
Fewer than 25 full-time equivalent employees.
What is the maximum credit?
50 percent of premiums paid for for-profit employers and 35 percent for tax-exempt employers.
How long does the credit last?
Two consecutive tax years, starting with the first year the employer qualifies.
What contribution is required?
A uniform percentage of at least 50 percent of the premium for each enrolled employee.
Does the plan have to be through SHOP?
Generally yes, with limited exceptions described in the IRS instructions.
Do owners count as employees?
Sole proprietors and certain family members of excluded owners do not count.
Who should file the credit?
A tax professional. The FTE and wage calculations are detailed.
Related Guides
Related reading: Nonprofit Health Benefits and Tax Credits · Tax Benefits of Group Health Insurance for Owners · How Employers Deduct Group Health Premiums · Starting a First Group Health Plan · Michigan Small Group Health Insurance · Group vs Individual Health Insurance · Benefits for Employers With 2 to 50 Employees · Business Owner Health Insurance Tax Guides · Owner Health Insurance Tax Savings Estimator · Which Owner Tax Guide Fits You · CPA Checklist for Owner Health Insurance Reporting
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Laws and rules referenced
26 U.S.C. § 45R — Small business health care tax credit.
This page is general information, not legal or tax advice. Rules change and facts matter, so confirm your situation with counsel or a qualified advisor.
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