Small Business Health Care Tax Credit

Do You Qualify?

The three steps (next column) assist small employers (business or tax-exempt) that provide qualified health insurance coverage to employees determine if they may qualify for the Small Business Health Care Tax Credit. In general, health insurance must be purchased through a Small Business Health Options Program (SHOP) marketplace.

Employees

The credit is reduced if the employer had more than 10 full-time equivalent employees (FTEs) for the tax year. If the employer had more than 25 FTEs for the tax year, the credit is reduced to zero. Generally, all employees who perform services during the year are taken into account when determining FTEs.

Excluded Employees

Hours, wages, and premiums paid for excluded employees are not counted when figuring this credit. Excluded employees include the owner of a sole proprietorship, partner in a partnership, shareholder who owns more than 2% of an S corporation, shareholder who owns more than 5% of a C corporation, person who owns more than 5% of the capital or profits of any other business that is not a corporation, and family members or a member of the household who qualifies as a dependent of any person listed above.

Seasonal Employees

Seasonal employees who work 120 or fewer days during the tax year are not considered employees in determining FTEs and average annual wages. But, premiums paid on their behalf are counted. Seasonal workers include retail workers employed exclusively during the holiday seasons.

Full-Time Equivalent Employees (FTEs)

The employer’s number of FTEs is determined by dividing the total hours of service for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by 2,080.

Average Annual Wages

The credit is reduced if the employer paid average annual wages of more than $32,400 (2024) for the tax year. If the employer paid average annual wages of $64,800 (2024) or more for the tax year, the credit is zero. Wages, for this purpose, mean wages subject to Social Security and Medicare tax withholding determined without considering any wage base limit. Average annual wages are total wages paid for the tax year divided by the number of FTEs.

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