Health Care Tax Credit for
Small Employers

Businesses that employ a minimal amount of employees can get a health care tax credit that can help them provide health insurance coverage for their employees.

Small businesses can get up to 35% (50% from 2014) and tax exempt employers can get up to 25% (35% from 2014) of the health insurance premiums they paid.

This credit can be used for any type of business including sole propietor, partnership, corporation, and tax-exempt charities.

Here is the criteria for an eligible employer for the small business health care tax credit for small employers:


The business cannot have more 25 full time equivalent employees (FTEs).

A full time equivalent employee (FTE) is not necessarily a single employee but an accumulation of 2080 paid working hours a year (40 hours times 52 weeks) from one or more employees. Simply put, two half-time employees working 20 hours per week is equal to one full-time equivalent employee.

A sole proprietor or partner of the business and their immediate family members are not included when calculating employees and the credit amount. Seasonal employees should also not be included when calculating the health care tax credit.

Sole proprietors must include all their employees including non-business employees like household help when counting the amount of FTEs. Employees from more than one business are combined when the same individual is the owner.

Wages Paid

The average wage per full-time equivalent employee (FTE) must be less than $50,000. However, limits are imposed once the average wage is above $25,000 and the tax credit is then slowly phased out and disappears when the average wage is $50,000.

Health Insurance Premiums Paid

The employer must pay at least half of the insurance premiums for the employees at the single (employee-only) coverage rate under a qualifying arrangement.These arrangements require the employer to pay a uniform percentage of the premiums for each employee.

The credit is calculated with the total health insurance premiums paid but this amount can be reduced if it is more than the state average premiums.


The maximum percentage is reduced if the average wage is more than $25,000 per year and there are more than 10 full-time equivalent employees (FTEs). Is is then slowly phased out and will be reduced to $0 when either the average wage reaches $50,000 or the company has 25 full-time equivalent employees (FTEs).

The credit is only refundable for tax-exempt employers as long as it is not more than the income tax withholding and Medicare tax withholding of the employees.

Other small businesses must apply it against the business's income tax liability. If the credit is more than the tax owed it can be carried back or forward to other years.

You will still be able to deduct the insurance premiums that you pay for your employees on your tax return, but you will need to deduct the credit amount from your tax deduction.

Other Information and How to File

Form 8941 Instructions includes more detailed information on how to file for this credit.

Form 8941 - Credit for Small Employer Health Insurance Premiums is used to file for the health care tax credit.

Updated October 19, 2012

› Health Care Tax Credit

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