Tax Credits and Deductions for Offering Health Benefits
From a federal credit to business deductions, here is where offering coverage can work in your favor, and what to ask your tax advisor.
What to Know First
Offering health benefits can pay you back at tax time in three main ways. Premiums you pay are generally deductible as a business expense. Some very small employers also qualify for a federal tax credit worth up to 50 percent of the premiums they pay. And reimbursements from an employer-funded health reimbursement arrangement, which includes an ICHRA, are generally not counted as income for your employees.
Which of these apply depends on your team size, your average wages, how your business is structured, and how you offer coverage. That last point matters more than most owners expect, because the credit is tied to coverage offered through a SHOP marketplace. The sections below walk through each piece, and your tax advisor can confirm how it fits your situation.
If you remember one thing
How you offer coverage can decide which tax benefits you can use, so ask before you choose a plan.
Who Qualifies for the Credit
Four tests decide whether you qualify, and you need to meet all of them. Here is what each one looks at.
Fewer than 25 full-time equivalents
The count is based on hours, not heads. Add up the hours your team works in a year and divide by 2,080 to see how many full-time equivalents you have. Business owners and their relatives are left out of the count, and so are seasonal workers on the job 120 days or fewer.
Average wages under the limit
Divide your total annual wages by your full-time equivalents to get your average. For tax year 2025, the IRS lists the limit as less than $67,000 per employee. The IRS's draft 2026 form references a higher figure of $69,000, but drafts can change, so check the final Form 8941 instructions for the year you claim.
You cover at least half the cost
The test looks at employee-only coverage, not family or dependent coverage. You need to pay at least 50 percent of that cost for each employee.
Coverage comes through SHOP
The plan generally needs to be a qualified health plan offered through a SHOP marketplace, with limited exceptions. That is why the way you offer coverage matters, and why it is worth asking an advisor before you choose a plan.
Meeting all four does not guarantee the full amount. The credit works on a sliding scale and gets smaller once you pass 10 full-time equivalents, or once your average wage rises above an inflation-adjusted amount.
How Claiming the Credit Works
The process is more straightforward than most owners expect. Here is the path from qualifying to filing.
Step 1
Confirm you qualify
Run through the four tests: team size, average wages, your share of premiums, and SHOP coverage. The instructions for IRS Form 8941 include worksheets that help with the headcount and wage math.
Step 2
Figure the credit on Form 8941
The IRS requires Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the amount. Your tax preparer will usually complete it for you.
Step 3
Claim it on your tax return
Small businesses include the amount as part of the general business credit on their income tax return. Tax-exempt organizations report it on Form 990-T, which they need to file in order to claim the credit, even if they do not usually file it.
Step 4
Keep the deduction for the rest
Premiums you pay above the credit amount can still be deducted as a business expense. If you owe no tax in a given year, small businesses can carry the credit back or forward to other years.
An example from the IRS
If you pay $50,000 a year toward employee premiums and qualify for a $10,000 credit each year, you could save $20,000 over the two years the credit is available. The credit period is two consecutive tax years, so it is worth planning which years you claim.
Questions for Your Tax Advisor
Your tax preparer or CPA can tell you what actually applies to your business. These six questions help you get the most out of that conversation.
Do we meet the four tests for the credit this year?
Bring your team's hours, your total wages, and your premium payments, so the advisor can run the headcount and wage math.
How does the way we offer coverage change what we can claim?
The credit is tied to SHOP coverage, so ask how your current plan, or one you are considering, fits.
How does our business structure affect this?
Owners are left out of the credit's headcount, and your own coverage can follow separate rules, such as the self-employed health insurance deduction.
Are there past years we could still claim?
An amended return may be possible, with refund limits. Ask which years are still open.
What happens to the premiums above the credit?
They can generally still be deducted as a business expense. Ask how to claim both.
What records should we keep?
Ask for a specific list, such as proof of premiums paid, payroll records, and plan paperwork, so you are ready at filing time.
More Questions About the Credit
What is the difference between a tax credit and a deduction?
A credit reduces the tax you owe. A deduction reduces the income you are taxed on. An eligible small employer can use both, since premiums above the credit amount can generally still be deducted as a business expense.
Can a nonprofit claim the credit?
Yes. Small tax-exempt employers can qualify for a credit of up to 35 percent of premiums paid. The credit is refundable for them, within limits, so a nonprofit with no taxable income may still receive a refund. To claim it, the organization files Form 990-T, even if it does not usually file one.
Do seasonal and part-time employees affect the credit?
Part-time hours add up to full-time equivalents, with 2,080 hours a year counting as one. Seasonal workers who are on the job 120 days or fewer are left out of the headcount and wage calculations, although premiums you pay for them may still count toward the amount of the credit.
Does the credit cover the premiums I pay for myself as the owner?
Generally no. Sole proprietors, partners, S corporation shareholders who own more than 2 percent, owners of more than 5 percent of a business, and their family members are left out of the calculation, and premiums paid on their behalf do not count toward the credit. Owner coverage may follow separate rules, which is worth raising with your tax advisor.
What counts as wages when I work out the average?
For this credit, wages mean the pay subject to Social Security and Medicare tax withholding, counted without applying any wage base limit. You total the wages paid to each employee in the headcount, then divide by your full-time equivalents. Seasonal workers who were on the job 120 days or fewer are counted as zero.
Do state tax credits or premium subsidies change the amount?
They can. If your state gives you a tax credit or a premium subsidy for the coverage you provide, your federal credit cannot be more than your net premium payments, which are the premiums you paid minus any state credits or subsidies. Ask your tax advisor whether a state program applies to you.
Does dental coverage count toward the credit?
It can. The IRS says a stand-alone dental plan offered through a SHOP marketplace is considered a qualified health plan for purposes of the credit. Ask your advisor how other add-on coverage is treated.
Where do I find Form 8941, and can I estimate the credit first?
The IRS publishes Form 8941 and its instructions on its website, on the page titled About Form 8941, Credit for Small Employer Health Insurance Premiums. The IRS also lists the Taxpayer Advocate Service Small Business Tax Credit Estimator among its resources, and your tax advisor can run the numbers with you.
This content is provided for informational purposes only and does not constitute legal or tax advice. Please consult your legal or tax advisor to determine how regulations apply to your situation.
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Disclosures
We are compensated by the insurance carriers for policies you choose through us. There is no direct cost to you. Compensation may vary by carrier and product. Information on this page is for educational purposes and does not constitute legal, tax, or accounting advice. Please consult your professional advisors about your specific situation. Tax treatment of ICHRA reimbursements can vary by employer and employee. We are licensed to advise clients in Pennsylvania, New Jersey, and Delaware. Contact us to confirm availability in other states.
