IRS Form 8941 – As a small business owner, providing health insurance to your employees can be a significant expense, but the IRS offers relief through the Small Employer Health Insurance Premium Credit. This tax credit, claimed using IRS Form 8941, can reduce your tax bill by up to 50% of the premiums you pay for qualifying employee health coverage. For tax-exempt organizations, the credit maxes out at 35%. With tax season approaching in 2026 for the 2025 tax year, understanding how to qualify, calculate, and claim this credit is essential for maximizing your savings.
In this comprehensive guide, we’ll break down everything you need to know about Form 8941, including eligibility, calculation steps, filing instructions, and key updates. Whether you’re a startup, a nonprofit, or a small firm navigating health care costs, this credit could make a big difference in your bottom line.
What Is the Small Employer Health Insurance Premium Credit?
The Small Employer Health Insurance Premium Credit, established under Section 45R of the Internal Revenue Code, incentivizes small businesses to offer health insurance to their employees. Eligible employers use Form 8941 to calculate and claim this credit on their annual tax returns. It’s available for tax years beginning after 2009, but since 2014, it’s limited to a two-consecutive-tax-year period.
The credit applies to premiums paid for health insurance coverage provided through a qualified health plan enrolled in the Small Business Health Options Program (SHOP) Marketplace. This ensures the coverage meets Affordable Care Act standards. For small businesses, the maximum credit is 50% of premiums paid, while tax-exempt employers (like 501(c) organizations) can claim up to 35%, limited by payroll taxes. The credit is refundable for tax-exempt entities and can offset both regular and alternative minimum taxes for others.
Key benefits include:
- Reducing the net cost of employee health benefits.
- Encouraging small employers to provide competitive perks.
- Potential tax refunds if the credit exceeds your liability.
However, the credit phases out based on factors like employee count and wages, and it’s not available indefinitely—only for two years once you start claiming it.
Who Qualifies for the Credit? Eligibility Requirements?
To be eligible for the Small Employer Health Insurance Premium Credit, your business must meet three main criteria:
- Pay Premiums Under a Qualifying Arrangement: You must cover at least 50% of the premium cost for each enrolled employee’s health insurance. This can include uniform percentages, composite billing (fixed amounts per tier like employee-only or family), or list billing (age-based rates). Exceptions apply for wellness programs, tobacco surcharges, and dependent coverage. Premiums must be for coverage through a SHOP Marketplace plan, with limited exceptions for areas without SHOP options.
- Fewer Than 25 Full-Time Equivalent Employees (FTEs): Calculate FTEs by totaling employee hours (up to 2,080 per person) and dividing by 2,080. Even if you have more headcount, part-time workers might keep you under 25 FTEs. Note: Employers with exactly 25 FTEs are typically ineligible due to phaseout rules. Seasonal workers (120 days or fewer) are excluded from FTE counts but can qualify for premium considerations.
- Average Annual Wages Below $67,000 per FTE: Wages are those subject to Social Security and Medicare taxes. Divide total wages by FTEs and round down to the nearest $1,000. If averages exceed $33,000, the credit begins to phase out.
Additional rules:
- Aggregation: Businesses under common control (e.g., parent-subsidiary groups) are treated as one employer.
- Exclusions: Sole proprietors, partners, >2% S-corp shareholders, and certain family members don’t count as employees.
- Hawaii Waiver: Employers in Hawaii cannot claim the credit for plan years after 2016.
If you’re a tax-exempt organization, you must be a 501(c) entity exempt under 501(a) to qualify.
How to Calculate the Small Employer Health Insurance Premium Credit?
Calculating the credit involves worksheets in the Form 8941 instructions. Here’s a step-by-step overview:
- Determine FTEs and Average Wages: Use Worksheet 1 to list employees, hours, and wages. Then, compute FTEs (Worksheet 2) and average wages (Worksheet 3).
- Identify Enrolled Employees and Premiums: In Worksheet 4, list enrolled employees, employer-paid premiums, adjusted average premiums (based on small group market averages in your area), and hours.
- Calculate Tentative Credit: Start with 50% (or 35% for tax-exempt) of premiums paid (Line 6). Reduce for FTEs over 10 (Worksheet 5) or wages over $33,000 (Worksheet 6).
- Apply Limitations: Adjust for average premium caps (Line 11), state subsidies/tax credits (Line 10), and other reductions.
- Final Credit Amount: This is Line 15 on Form 8941, including any pass-through credits.
For example, a business with 15 FTEs, $40,000 average wages, and $100,000 in qualifying premiums might see a phased-out credit of around 30-40% after adjustments.
Use county-specific average premium tables (e.g., Alabama’s Autauga County: $8,741 for employee-only, $24,330 for family) to adjust calculations.
Step-by-Step Guide to Filing IRS Form 8941
Filing is straightforward but requires attachments:
- Gather Documents: Employee records, premium statements, SHOP enrollment proof, and wage data.
- Complete Form 8941: Fill out lines based on worksheets. Check “Yes” on Line A if qualifying through SHOP (or exceptions).
- Attach to Your Tax Return:
- Businesses: Attach to Form 3800 (General Business Credit) on your income tax return.
- Tax-exempt: Attach to Form 990-T, even if no unrelated business income.
- Pass-through entities (partnerships, S-corps): File Form 8941 to claim; owners report on personal returns.
- Reduce Deductions: Subtract the credit amount from your health insurance expense deduction.
File electronically for faster processing. The credit period starts the first year you file with a positive credit on Line 12.
Limitations, Phaseouts, and Reductions
The credit isn’t unlimited:
- Phaseouts: Reduces if FTEs exceed 10 (fully phases out at 25) or wages exceed $33,000 (fully at $67,000).
- Average Premium Limit: Can’t exceed what you’d pay at average small group rates.
- State Subsidies: Credit limited to net premiums after subsidies.
- Payroll Tax Cap for Tax-Exempt: Limited to federal income and Medicare taxes withheld/paid.
- Two-Year Limit: No extensions beyond the credit period.
These ensure the credit targets truly small employers.
Recent Updates for the 2025 Tax Year
For taxes filed in 2026 (2025 tax year):
- Average wage threshold increased to $67,000 (from prior years).
- Updated county-specific average premium tables.
- Continued SHOP requirement with exceptions for limited-availability counties (per Notice 2018-27).
- Hawaii waiver remains in effect.
- No major legislative changes, but check IRS.gov/Form8941 for post-publication updates.
Frequently Asked Questions About Form 8941
Can I claim the credit if I use a non-SHOP plan?
Generally no, but exceptions apply in counties without SHOP options.
What if I have part-time employees?
They count toward FTEs based on hours worked, potentially keeping you eligible.
Is the credit refundable?
Yes for tax-exempt employers; for others, it’s non-refundable but can carry forward as part of general business credits.
How does the credit affect my premium deduction?
It reduces the deductible amount by the credit value.
Where can I download Form 8941?
From the IRS website: https://www.irs.gov/pub/irs-pdf/f8941.pdf.
Maximize Your Tax Savings with Form 8941
The Small Employer Health Insurance Premium Credit via Form 8941 is a valuable tool for offsetting health care costs and supporting your workforce. By meeting eligibility, accurately calculating the credit, and filing correctly, you can significantly lower your tax burden. Consult a tax professional for personalized advice, especially if aggregation rules or phaseouts apply. For the latest details, visit IRS.gov or review the official instructions. Investing in employee health not only boosts morale but also delivers real financial benefits—start claiming today!