The Small Business Health Care Tax Credit (Ultimate Guide)

The Small Business Health Care Tax Credit exists to help offset the costs of group health insurance plans for employees. For small business owners, this federal income tax credit can be worth up to 50% of your yearly investment in group health insurance for employees. Non-profit organizations can get an income tax credit up to 35% of their investment in group health insurance.

Small business owners have a lot on their plate. A huge part of your success relies on employee retention, human resources issues, and your ability to navigate income taxes.

Consider this unbiased article your Ultimate Guide to the Small Business Health Care Tax Credit. It’s aimed at entrepreneurs and new small business owners, but any human resources manager or more experienced business owner will find it enlightening.

We’ll start with the most practical information, like how to qualify for this small employer income tax credit, and how to claim it on your taxes. Then we’ll explore the history of Affordable Care Act (ACA.)

You can jump to:

How the Small Business Health Care Tax Credit works
How to qualify for the Health Care Tax Credit
What is SHOP?
Can my company qualify for the Tax Credit without SHOP?
How to claim Health Care Tax Credit
Do small businesses have to provide health insurance for employees?
The Small Business Health Care Tax Credit and entrepreneurs
The History of the Affordable Care Act (ACA)

Let’s begin with a better understanding of how this valuable income tax credit works.

How Does the Small Business Health Care Tax Credit Work?

In a nutshell, small business owners report their company’s expenses for group health insurance for employees at tax time. Depending on the size of your business and your average payroll per employee, you will receive a credit against the amount of federal income tax your business owes. That credit could be as much as 50% of your premium payments.

Which Businesses Get the Best Benefit from the Small Business Health Care Tax Credit?

Smaller organizations with fewer employees receive a bigger credit than larger companies. The smallest businesses, those with fewer than 10 employees who earn $27,000 or less yearly, get the best benefit.

For-Profit Organizations

The Small Business Health Care Tax Credit is available to US employers with Employer Identification Numbers(EINs.) You can think of an EIN like a Social Security Number, but for your business. You’ll use this number every year to file income taxes, and it should be displayed on your employees’ W2 forms.

If you’re just launching your small business, you can apply for your EIN online at the IRS website.

For Non-Profit Organizations

Non-profit entities, like charities, political organizations and churches, can also receive the Tax Credit. You’ll need to be recognized by the IRS as a 501c3 charity.

How to Qualify for the Small Business Health Care Tax Credit

You must enroll your employees in a group health insurance plan via SHOP, and we’ll explain that in detail shortly. Beyond that, your business will qualify for this income tax credit for health insurance if:

You have fewer than 25 full-time employees. Specifically, you must have 24 full-time staffers, or less.
Their average yearly salary is $56,000 or less (as of 2022, but this can change.)
Your company pays at least 50% of your employees group health insurance costs.
You offer SHOP plans to all your full-time employees.

Note that you don’t need to offer health insurance to part-time staff, and you don’t need to offer it to spouses or dependents.

Does It Cover All My Health Insurance Costs?

No. At most, a for-profit company will get a credit worth 50% of the health insurance premiums paid. For example, if your small business spent $10,000 on health insurance premiums for eight employees, you’ll get a $5,000 credit on your business income taxes.

However, your company’s premium payments are directly tax deductible, they are a cost of doing business. So, think of this Tax Credit as a valuable bonus, not a write off.

My New Charity Organization is Not a 501c3. Will We Qualify for the Tax Credit?

Unfortunately, no. Charity organizations can earn a tax credit of up to 35% of their health insurance premiums, but only if they are registered as a 501c3 organization with the IRS. You can find detailed information about getting your 501c3 at the IRS website.

What is SHOP?

Per Healthcare.gov, the Small Business Health Options Program (SHOP) is a health care and dental insurance marketplace for small businesses. You can enroll your company online or buy a SHOP group health insurance plan through most licensed health insurance agents.

What are the Benefits of SHOP for Employers?

First, the Small Business Health Care Tax Credit applies to small organizations buying health insurance through a SHOP plan. So, employers can get a significant credit for supplying health insurance to employees.

Furthermore, employers using SHOP can:

Offer multiple group health insurance plans to employees or select only one.
Offer healthcare plus dental, only health insurance, or only dental insurance.
Choose how much your business will pay for employee health insurance. Remember, your company must pay at least 50% of your employees’ premiums to qualify for the Small Business Health Care Tax Credit.
Decide how long a new employee must wait before receiving health insurance benefits, but this cannot exceed 90 days.

Historically, many employers required a 60- or 90-day probationary period for new hires before benefits like group health insurance would kick in. But in 2022, the employment landscape is very competitive. So, many employers offer immediate coverage to attract and keep the best talent.

Does My Small Business Qualify for SHOP?

Your organization will qualify for SHOP — an important part of the Small Business Health Care Tax Credit — if:

Your primary business address is in the state where you’re buying
You have at least one full-time employee who is not an owner, partner, or their spouse.
Have 1 – 50 full time equivalent (FTE) employees (but remember, the Small Business Health Care Tax Credit only covers organizations with 24 employees or less.)
You will offer SHOP to all full-time staff.

Note that although you must offer SHOP to all staff, they aren’t required to enroll. If your employee, for instance, has health insurance coverage through their spouse, they may choose to decline coverage at your company. That’s okay, you will still qualify for SHOP, and that will help you qualify for the small employer health insurance tax credit.

Does a Sole Proprietor or Partner Qualify as a Full Time Employee for SHOP?

No. According to Small Business Health Care Tax Credit calculators at Healthcare.gov, partners and sole proprietors are not considered employees.

I Own a Small Business, Can I Enroll Myself and My Spouse in a SHOP Program?

Absolutely, as the owner of a company you can enroll in a SHOP health insurance plan through your company. You can also enroll your spouse and cover your dependents. But you don’t count as an employee of the business.

And remember, you can enroll in SHOP with up to 50 employees, but only small businesses with 24 full-time employees or less will qualify for the Tax Credit.

Can My Company Qualify for the Small Business Health Care Tax Credit Without SHOP?

In 2022, enrolling in group health insurance via SHOP — either by yourself or with a SHOP-approved insurance agent — is the surefire way to earn your Small Business Health Care Tax Credit. It’s almost impossible to qualify for this small employer tax credit for health insurance without SHOP.

Small business owners get confused about this, because in the past, the IRS published guidelines for organizations that had difficulty finding a SHOP plan in their area. But that’s old news, and employers in all states now have access to group insurance plans that qualify for the Small Business Health Care Tax Credit.

To be clear: You must offer group health insurance via SHOP to get the Tax Credit. You can enroll your business online in these programs or get help from a licensed insurance agent.

How to Claim the Small Business Health Care Tax Credit at Tax Time

Per the IRS, you’ll file form 8941 when filing your business income taxes to claim the Tax Credit.

Thanks to the magic of the internet, many small business owners use tax preparation services like TurboTax, H&R Block, FreeTaxUSA and the like. They should include this form for small organizations. But you should do your due diligence as a business owner. Double-check that your return includes this form.

If you use a professional Certified Public Accountant (CPA), remind them of your small employer status and the Small Business Health Care Tax Credit. CPAs are only human, after all, and they get busy at tax time. It would be an expensive mistake to forget this healthcare tax credit for small employers.

As a Small Business Owner, Do I Have to Provide Health Insurance for Employees?

No. As of 2022, there is no federal or state law that requires small businesses — those with fewer than 50 employees — to provide health insurance for employees.

With that said, many small business owners realize that great employees work for more than wages. Health insurance is highly sought after in our competitive employment landscape.

The Small Business Health Care Tax Credit for Entrepreneurs

Entrepreneurship has been thriving since the COVID-19 pandemic. Many people were forced to find creative ways to earn money, while others were finally given the opportunity to explore life outside the “rat race.”

Fun facts:

In 2020, 4.3 million entrepreneurs launched new businesses
That’s record-breaking increase of 24% over 2019.
Of all those new businesses, 2.8 million are online based “micro businesses” with fewer than 10 employees

If you provide health care coverage for your employees, and pay at least 50% of the premiums, you should absolutely claim the Small Business Health Care Tax Credit. Ultimately, even the smallest businesses can save thousands of dollars at tax time.

I’m Self-Employed. Do I Qualify for the Small Business Health Care Tax Credit?

Side-hustles and gig employment also skyrocketed during the COVID-19 pandemic. But a self-employed individual does not qualify for the Small Business Health Care Tax Credit. To qualify, you must have at least one full-time employee, and have an EIN registered with the IRS.

History of the Small Business Health Care Tax Credit and the Affordable Care Act (ACA)

President Barack Obama enacted the ACA in 2010 to make health insurance more affordable for Americans. Plus, the ACA it revolutionized the way health insurance companies do business in the US. For example, before the ACA, health insurance providers could decline coverage to individuals with pre-existing conditions.

The ACA also created a standardized tier system, named for precious metals, like bronze, silver, gold and platinum. In short, the bronze plan offered by Company A is identical to a bronze plan offered by Company B. The goal was to make health insurance shopping easier for consumers, who now can compare prices with more confidence.

Furthermore, the ACA made certain services compulsory on all plans. Mental health services, for example, are now included on all health insurance plans, though out-of-pocket costs will vary.

The Small Business Health Care Tax Credit is also part of the ACA. While it doesn’t force small businesses to offer health insurance, employers are encouraged to do so via write-offs and tax credits. This way, more Americans have access to health insurance through employment, because small businesses and non-profits can afford to offer it.