IRS Instruction 8941 – IRS Forms, Instructions, Pubs 2026 – In today’s competitive business landscape, providing health insurance to employees can be a significant expense for small employers. Fortunately, the IRS offers a valuable tax incentive through the Small Employer Health Insurance Premium Credit, claimed using Form 8941. This credit helps eligible small businesses and tax-exempt organizations offset the cost of providing health coverage. In this comprehensive guide, we’ll break down the IRS Instruction 8941, covering eligibility, calculations, and step-by-step filing instructions for tax year 2025. Whether you’re a small business owner or a tax professional, understanding this credit can lead to substantial savings.
What is the Small Employer Health Insurance Premium Credit?
The Small Employer Health Insurance Premium Credit is a tax benefit designed to encourage small employers to offer health insurance to their employees. Established under section 45R of the Internal Revenue Code, it’s available for tax years beginning after 2009. For 2025, the credit can cover up to 50% of qualifying premiums paid by for-profit employers or 35% for tax-exempt organizations, but it’s subject to limitations based on employee count, wages, and other factors.
The credit is refundable for tax-exempt eligible small employers (such as 501(c) organizations) and is claimed on Form 990-T, limited to certain payroll taxes paid. For other employers, it’s non-refundable and part of the general business credit on Form 3800, which can offset both regular tax and alternative minimum tax. Importantly, after 2013, the credit is only available for a maximum of two consecutive tax years and requires coverage through a Small Business Health Options Program (SHOP) Marketplace.
This incentive not only reduces your tax liability but also requires you to reduce your deduction for health insurance premiums by the amount of the credit claimed. For more details on SHOP plans, visit Healthcare.gov.
Eligibility Requirements for the 2025 Tax Year
To qualify as an eligible small employer for the 2025 tax year, you must meet three key criteria:
- Qualifying Arrangement for Premiums: You must pay at least 50% of the premium cost uniformly for each enrolled employee’s health insurance coverage. This can include composite billing (uniform premiums across tiers like employee-only or family) or list billing (age-based premiums), with exceptions for wellness programs, tobacco surcharges, and dependent coverage. Coverage must generally be offered through a SHOP Marketplace, though exceptions apply in areas without SHOP options (per Notice 2018-27) or for Hawaii, where a state waiver prevents claims for plans after 2016.
- Fewer Than 25 Full-Time Equivalent Employees (FTEs): Calculate FTEs by dividing total employee hours of service by 2,080 (capping at 2,080 per employee). Seasonal workers (120 days or less) are excluded from this count, but their premiums may still qualify. Note that employers with exactly 25 FTEs are typically ineligible due to phaseout rules.
- Average Annual Wages Below $67,000 per FTE: Wages are based on amounts subject to Social Security and Medicare withholding. Round down to the nearest $1,000. If wages exceed $33,000 and FTEs exceed 10, the credit phases out.
Related employers (e.g., controlled groups or affiliated service groups) are treated as a single employer for these tests. Excluded from employee counts are owners, partners, certain shareholders, and family members. Leased employees may count under specific conditions.
If you’re a tax-exempt organization, you must be described in section 501(c) and exempt under 501(a), or a farmers’ cooperative under section 1381.
How to Calculate the Small Employer Health Insurance Credit?
Calculating the credit involves several steps and worksheets from Instruction 8941. Here’s an overview:
- Determine Eligible Premiums: Only the employer-paid portion of premiums for qualifying health coverage counts. Include wellness costs but exclude employee contributions via salary reductions. Adjust for state subsidies or tax credits, which reduce the credit.
- Apply Limitations:
- FTE Limitation: If FTEs exceed 10, reduce the credit by (FTEs – 10)/15.
- Wage Limitation: If average wages exceed $33,000, further reduce by (average wages – $33,000)/$34,000 (adjusted for 2025).
- Average Premium Limitation: Cap premiums at state-specific average small group market rates (use tables in instructions by county, e.g., Alabama’s Autauga County: $8,741 for employee-only, $24,330 for family).
- Credit Percentage: Multiply eligible premiums (after limitations) by 50% (for-profit) or 35% (tax-exempt). For tax-exempts, cap at payroll taxes (federal income and Medicare withheld plus employer Medicare paid).
Use Worksheets 1-7 in the instructions for precise calculations. For example, Worksheet 2 computes FTEs, while Worksheet 4 totals premiums and hours for enrolled employees.
Step-by-Step Instructions for Completing Form 8941
Follow these steps based on the 2025 instructions:
- Line A: Check “Yes” if premiums were paid through SHOP (enter Marketplace ID) or qualify for an exception.
- Line B: Reserved.
- Line C: Check “Yes” if this is not your first year claiming the credit post-2013.
- Lines 1-3: Enter totals from Worksheets 1-3 (employees, FTEs, average wages).
- Lines 4-6: Premiums paid, average premiums from state tables, and the lesser of the two.
- Line 7: Multiply line 6 by 50% (or 35% for tax-exempts).
- Lines 8-9: Apply FTE and wage phaseouts via Worksheets 5-6.
- Line 10: Subtract state subsidies.
- Line 11: Lesser of line 9 or 7 (after adjustments).
- Line 12: Credit before other limitations.
- Lines 13-14: Adjust for enrolled FTEs via Worksheet 7.
- Line 15: Add credits from pass-through entities (e.g., K-1s).
- Line 16: Total credit.
- Line 17: Allocate for cooperatives, estates, or trusts.
- Line 18: For tax-exempts only – credit after payroll tax limit.
- Line 19: Payroll taxes for tax-exempt limitation.
Partnerships, S corps, and similar entities must file Form 8941; others report directly on Form 3800.
Common Mistakes to Avoid When Using Form 8941
- Failing to use SHOP Marketplace coverage (post-2013 requirement).
- Including ineligible employees (e.g., owners or seasonal workers in FTE counts).
- Not adjusting for state average premiums or subsidies.
- Claiming beyond the two-year period.
- Forgetting to reduce your health insurance deduction by the credit amount.
Always double-check worksheets and use the correct county-based premium tables.
Recent Updates and Changes for the 2025 Tax Year
As of the 2025 instructions (revised December 17, 2025), there are no major legislative changes, but key figures have been updated for inflation:
- Average wage threshold: $67,000 per FTE (up from prior years).
- Wage phaseout starts at $33,000.
- Hawaii waiver continues – no credit for post-2016 plans.
- Updated state premium tables reflect 2025 small group market averages.
For the latest developments, check IRS.gov/Form8941. No sequestration reductions are expected for 2026 refunds, based on prior guidance.
Filing and Claiming the Credit: Next Steps
File Form 8941 with your tax return (e.g., attach to Form 1120, 1065, or 990-T). If you’re using tax software, ensure it supports the form’s limitations. For pass-through entities, allocate the credit to owners via K-1s.
Consult a tax advisor for complex situations, such as multi-state operations or related employers. By leveraging this credit, small employers can make health insurance more affordable, boosting employee retention and satisfaction.
For official forms and instructions, download from IRS.gov. This guide is based on the most current IRS resources as of February 2026.