The Small Business Health Care Tax Credit is the one federal incentive built specifically for employers under 25 employees, and it is widely misunderstood. Some owners assume it applies to any small business that offers coverage. Others assume it expired. Neither is right. This guide explains the four tests, how the credit phases out, and how to tell whether your team is in range. It is general information, not tax advice; confirm your numbers with a tax professional.
TL;DR
To qualify, an employer needs fewer than 25 full-time equivalent employees, average annual wages below an inflation-adjusted limit ($68,200 for 2026), a contribution of at least 50 percent of the employee-only premium, and a plan bought through the Small Business Health Options Program (SHOP). The credit is worth up to 50 percent of employer-paid premiums for for-profit businesses and 35 percent for tax-exempt ones. The full credit is available only at 10 or fewer FTEs with average wages at or below half the limit ($34,100 for 2026); it phases down from there and is gone at 25 FTEs or at the wage limit. It can be claimed for two consecutive tax years.
The Four Tests
Quick answer: Fewer than 25 full-time equivalents. Average annual wages below the year's limit. An employer contribution of at least 50 percent of the employee-only premium for every enrolled employee. Coverage purchased through a SHOP-eligible plan.
All four have to be true for the same tax year. The size and wage tests are about the whole business, not just the people on the plan. The contribution test is about what you pay toward each enrolled employee's own coverage. The SHOP test is about how the plan was purchased. Miss any one and the credit is not available for that year, even if the other three are comfortably met.
Counting Full-Time Equivalents the Credit's Way
Quick answer: Add up every employee's hours of service for the year and divide by 2,080, rounding down. Owners and their family members are excluded from the count. Seasonal workers who work 120 days or fewer are excluded too.
The credit's FTE count is its own calculation, separate from the ACA employer mandate's method. Two part-time employees working about 1,040 hours each count as one FTE. Business owners, partners, more-than-2 percent S corporation shareholders, more-than-5 percent owners, and their family members are not counted as employees for this purpose, and their wages do not enter the average. That exclusion helps many owner-run teams land under the thresholds.
The Wage Test
Quick answer: Total wages paid to counted employees, divided by the FTE count, must be below the year's limit. For 2026 the limit is $68,200. The full credit requires average wages at or below $34,100.
Average wages are calculated on the same employee base as the FTE count, so owners and family members drop out of both the numerator and the denominator. A business with eight counted FTEs and $400,000 in counted wages has an average of $50,000, which is under the 2026 limit but above the level for the full credit. The limits are adjusted for inflation each year, so check the current figure for the tax year you are claiming.
How Much the Credit Is Worth
Quick answer: Up to 50 percent of the employer's share of premiums for a for-profit business, and up to 35 percent for a tax-exempt organization. The percentage phases down as FTEs rise above 10 and as average wages rise above half the limit. The credit is available for two consecutive years.
The reduction is on a sliding scale in two directions. Each FTE above 10 reduces the credit, and it reaches zero at 25. Each dollar of average wages above half the limit reduces it as well, reaching zero at the full limit. A business at 12 FTEs with average wages of $40,000 gets a partial credit; a business at 8 FTEs with average wages of $30,000 gets the full percentage. The premium counted toward the credit is also capped at the average small-group premium the IRS publishes for the employer's area, so a very rich plan does not produce a larger credit than the benchmark allows. For-profit businesses claim it on Form 8941 as part of the general business credit.
The SHOP Requirement
Quick answer: The plan must be a SHOP-eligible small-group plan. In most states, including Florida, SHOP enrollment runs through a broker or directly with the insurer rather than through a website, and the employer's SHOP eligibility is confirmed as part of that process.
SHOP is the small-business side of the ACA Marketplace. Since 2018 most states no longer run a separate online SHOP enrollment; instead, eligible small employers enroll in SHOP-certified plans through an agent or the carrier. The practical point for a team under 25 is that the plan you buy has to be one that qualifies, and the paperwork has to establish SHOP eligibility for the year you claim the credit. We handle that step when the credit is in play.
An Illustrative Example
Illustrative only, not tax advice: A for-profit business with 8 counted FTEs, average wages of $30,000, and $30,000 a year in employer-paid premiums on a SHOP-eligible plan would be eligible for the full 50 percent credit, or up to $15,000 against its federal tax for the year, subject to the area premium cap.
Change one input and the picture shifts. At 14 FTEs the same business gets a partial credit. At average wages of $60,000 it gets a smaller partial credit. At 25 FTEs or at $68,200 in average wages, it gets nothing. This is why the credit rewards exactly the kind of business we work with: small teams with modest average wages that are offering coverage for the first time.
Common Misses
- Counting the owner. Owners and family members are excluded from FTEs and wages. Including them can push a business over a threshold it is actually under.
- Forgetting part-time hours. Part-time employees count toward FTEs by hours. A business with five full-timers and six part-timers may be at eight FTEs, not five.
- Buying a non-SHOP plan. The contribution and size tests can be perfect, but if the plan is not SHOP-eligible the credit is not available.
- Contributing less than half. The 50 percent test applies to the employee-only premium for each enrolled employee.
- Missing the two-year window. The credit is limited to two consecutive tax years. Plan the timing so both years count.
Key Takeaway
The credit is real, it is aimed at teams under 25, and it is worth up to half of what you pay in premiums for two years. The tests are strict, the FTE and wage math has its own rules, and the plan has to be SHOP-eligible. If your team is small and average wages are modest, ask about it before you pick a plan, not after.
Frequently Asked Questions
Does the Small Business Health Care Tax Credit still exist in 2026?
Yes. It remains part of the federal tax code, with the average wage limit adjusted for inflation each year. For 2026 the limit is $68,200, and the full credit requires average wages at or below $34,100.
How many employees can I have and still qualify?
Fewer than 25 full-time equivalents, counted by hours of service and excluding owners and their family members. The full credit is available at 10 or fewer FTEs, and it phases down between 10 and 25.
Do I have to buy through SHOP?
Yes, the plan must be SHOP-eligible. In most states enrollment runs through a broker or directly with the insurer, and SHOP eligibility is confirmed as part of that process.
How many years can I claim it?
Two consecutive tax years. After that, the credit is no longer available to that employer, though the premiums remain a deductible business expense.
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Fewer than 25 employees? That is exactly who we work with. See the guides for 2 to 10 and 10 to 25 employees.
Fewer than 25 employees? That is exactly who we work with. See the guides for 2 to 10 and 10 to 25 employees.