What is Form 8941?

Comprehensive health benefits are a great way to attract and retain talented workers. However, finding affordable health benefits can be challenging for small business owners with a limited budget. One option available for small employers is the Small Business Health Care Tax Credit.

The Small Business Health Care Tax Credit subsidizes the cost of employee health insurance plan premiums, making these benefits more affordable for many business owners. However, for a small employer to claim the credit, they must calculate the amount they’re eligible for and file IRS Form 8941 along with their annual tax return¹.

You should consult a tax professional if you need specific assistance filing Form 8941. But, this blog will provide general guidance on Form 8941, including who’s eligible to file it and how to fill it out.

Takeaways from this blog post:

• The Small Business Health Care Tax Credit allows qualifying small businesses to receive a refundable tax credit for offering an employee health plan. The maximum tax credit available is 50% of healthcare premiums for small business employers and 35% for small tax-exempt employers.
• Eligible employers must have fewer than 25 full-time equivalent employees (FTEs), pay an average annual employee salary of $56,000 or less, offer SHOP health coverage, and pay at least 50% of their full-time employees’ premium costs.
• Small employers must use IRS Form 8941 to calculate and claim the tax credit. Employers must also file Form 3800 alongside Form 8941 to report and claim their various business credits for the tax year.

What is the Small Business Health Care Tax Credit?

The Small Business Health Care Tax Credit allows qualifying small businesses to receive up to 50% of the employee health insurance premiums they paid in a tax year as a refundable tax credit. Those eligible for the credit can receive much-needed financial assistance to provide their employees with qualifying health insurance coverage.

The tax credit reduces your tax bill dollar for dollar. For example, if your tax credit was $8,000, you would save $8,000 on your tax bill. Since it’s a refundable credit, you can receive a refund if your tax bill drops below $0.

Who’s eligible to file Form 8941?

To qualify for the tax credit, you must meet the following requirements:

• You have fewer than 25 full-time equivalent (FTE) employees.
• Your average employee salary is about $56,000 per year or less.
• You pay at least 50% of your full-time employees’ premium costs.
• You offer a Small Business Health Options Program (SHOP) plan³ to all your FTEs (unless you qualify for an exemption⁴).
  • You can register for the SHOP program through the Health Insurance Marketplace or through a SHOP-registered agent or broker.
• Your organization isn’t based in Hawaii. CMS issued Hawaii a State Innovation Waiver in 2016 and extended it in 2021. As a result, employers in Hawaii can’t offer a SHOP plan or claim the tax credit.

If your company employs fewer than 10 employees and you pay them an average annual salary of $27,000 or less, you can qualify for the highest tax credit amount.

Partnerships, S corporations, cooperatives, estates, trusts, and tax-exempt eligible small employers must file Form 8941 to calculate and claim their credit. Tax-exempt organizations must also file and include the amount on line 44f of Form 990-T to claim the credit².

Organizations whose only source for the credit is from a partnership, S corporation, estate, trust, or cooperative or if they received the credit as a transfer from an unrelated eligible taxpayer shouldn’t complete and file Form 8941. Instead, these businesses should only report their credit in Part 3, line 4h of Form 3800.

What’s the largest amount you can qualify for using Form 8941?

Typically, the smaller your company, the bigger the credit you can receive to help pay for your employees’ health insurance premiums.

The maximum amount of tax credit available is:

• 50% of employee health insurance premiums paid for small business employers
• 35% of employee health insurance premiums paid for small tax-exempt employers

Unfortunately, the tax credit is only available to eligible employers for two consecutive taxable years. However, you can carry the credit back or forward to other tax years. For example, if you receive a $8,000 credit on a $4,000 tax bill, you can apply $4,000 to another year’s tax return.

If your total premium payments exceed your credit amount, you can deduct the excess premiums as a business expense when you file your federal taxes.

How do you fill out Form 8941?

First, fill out lines A, B, and C. These lines ask if you paid premiums for SHOP coverage (or qualify for an exemption), require you to list your employer identification number (EIN), and ask about any previously filed 8941 Forms. If you answer “no” on line A you only need to complete the form if you must report a credit on line 15.

Next, complete the seven worksheets to calculate your credit. Each worksheet provides step-by-step instructions to help you accurately calculate and claim your credit.

“The IRS expects rock-solid records demonstrating eligibility and supporting every single number that rolls up into premium and credit calculations,” Alec Kellzi, a licensed, certified public accountant (CPA) in California, said. “Having an organized, comprehensive, easily auditable paper trail can mean the difference between a valid credit and one that is entirely disallowed. My biggest piece of advice is to take your time and read the instructions thoroughly. Form 8941 is no simple task, but approaching it the right way can result in an incredibly valuable payoff for small businesses. It's worth the effort to maximize this generous credit.”⁵

To help you get started, we’ll briefly walk you through simplified instructions for each worksheet to give you a better idea of how to fill out Form 8941.

Worksheet 1

You need Worksheet 1 to complete line 1 on Form 8941 and Worksheets 2 and 3.

This worksheet has three columns:

• Column (a) - Individuals considered employees: List the names of each individual you consider an employee during the tax year in this column. Write the total number in line 1 of the form.
  • You should generally count all employees who perform services for you unless they meet specific criteria or are exempt⁶.
  • Don’t include partnership or sole proprietorship owners or any S corp shareholder with more than 2% ownership. You also shouldn’t include anyone who owns more than 5% of the outstanding stock or has more than 5% of voting power in a corporation.
• Column (b) - Hours of service: Enter each employee's total hours of service in column (a).
  • No employee’s hours should exceed 2,080 hours. Additionally, you should enter zero for seasonal employees who worked 120 or fewer days during the tax year.
• Column (c) - Wages paid: Enter the total wages you paid each employee listed in column (a). Put a zero for seasonal employees who worked 120 or fewer days during the tax year.
  • Tip: Complete Worksheet 2 before you complete this column. Don't complete this column if Worksheet 2, line 3 is 25 or more.

Worksheet 2

This worksheet will help you calculate your FTEs. Take the total employee hours of service from Worksheet 1, column (b), and divide it by 2,080. The result will be your FTE count. Round down to the next lowest whole number if your result isn’t a whole number. Write the amount on line 2 of the form. If your FTE count is less than one, round up to one.

If your FTE count is 25 or more, skip lines 3 through 11 and enter zero on line 12.

Worksheet 3

With this worksheet, you can find the average annual wages paid per FTE for the tax year. Take the total wages paid from Worksheet 1, column (c), and divide by your total FTE count in Worksheet 2. Write the result on line 3 of the form.

Your credit will be zero if you paid an average annual employee wage of $62,000 or more. In this case, skip lines 4 through 11 and enter zero on line 12.

Worksheet 4

You need Worksheet 4 to complete lines 4, 5, 13, and Worksheet 7.

This worksheet has four columns:

1. Column (a) - Enrolled individuals considered employees: Enter the names of each individual on Worksheet 1, column (a) who were enrolled in employer health insurance coverage under a qualifying arrangement. Write the total number in line 13 of the form (unless line 12 is zero).
   1. A qualifying arrangement generally requires you to pay a set percentage of 50% or more of the premium cost for each enrolled employee's health coverage. You should only count employee premiums you paid under a qualifying arrangement to determine your tax credit amount.
2. Column (b) - Employer premiums paid: In this column, enter the total employer premiums you paid for each employee in column (a). Write the total in line 4 on the form.
   1. “Tracking and substantiating the premiums paid each month under a qualifying arrangement is another tricky aspect. The IRS wants to see detailed records backing up those premium amounts. I advise clients to have a designated form or spreadsheet where they meticulously record and classify premium payments throughout the year,” CPA Alec Kellzi told PeopleKeep⁵.
3. Column (c) - Adjusted average premiums: Write the average premium based on your location in this column. You can find the tables listing the average premiums for the small group market in each rating area on pages 11 through 31 of the Form 8941 instructions⁷. Write the total on line 5 on the form.
4. Column (d) - Enrolled employee hours of service: Enter the amount from column (b) of Worksheet 1 for each employee listed in column (a) of Worksheet 4.
   1. Tip: Don’t complete this column if line 12 is zero.

Fill in any remaining blanks from lines 1 through 13 (except for lines 8 and 9) by following the line instructions on the form. You only need to complete the remaining worksheets if you meet certain conditions.

Worksheet 5

You won't qualify for the entire credit if the number you wrote on line 2 exceeds 10. But Worksheet 5 can help you find the actual credit you’re eligible for.

Below is a table of IRS-provided instructions for Worksheet 5:

Worksheet 6

You can’t receive the full credit if your average wages exceed $30,000 per year. If greater than $30,000, you must complete Worksheet 6.

Below is a table of IRS-provided instructions for Worksheet 6:

Worksheet 7

If line 12 is greater than zero, you need to complete Worksheet 7 to fill out line 14. This worksheet is similar to Worksheet 2. But this time, you only need to include employees enrolled in your employer-sponsored health coverage.

Take the total enrolled employee hours of service from Worksheet 4, column (d), and divide it by 2,080. Round down to the next lowest whole number if your result isn’t a whole number. However, if the result is less than one, enter one. Write the amount on line 14 of the form.

Once you complete this worksheet, add the calculated value to line 14 of Form 8941. Review any unfinished lines and fill them out if they apply to you to complete the form and find your credit amount.

What are the reporting requirements for Form 8941?

If you’re claiming the Small Business Health Care Tax Credit and filing Form 8941, you must also file Form 3800⁸. Form 3800 is a summary report of each general business credit an organization claims for that tax year—including credits carried backward or forward from other years. You use this form to report and add up your various business tax credits, ensuring you don’t exceed the maximum credit dollar amount set by the federal government.

To report the Small Business Health Care Tax Credit, enter your credit amount from Form 8941 in Part 3, line 4h of Form 3800. You should also attach a statement showing the tax year the credit began, the amount of the credit on the original return, the maximum credit amount allowed for that year, and whether the total carryforward amount differs from the original amount. When you’re done, file Forms 8941 and 3800 with your business tax return.

As mentioned above, tax-exempt small employers must claim their credit by filing Form 990-T, even if the employer doesn’t usually file this tax form.

Conclusion

Providing health insurance to your employees doesn’t have to break your budget. The Small Business Health Care Tax Credit helps employers save money on employee health plan premiums by reducing their overall tax bill. But before receiving your credit, you must complete Form 8941 according to IRS regulations. By filling out this form accurately, you can fully take advantage of tax benefits and better support your employees’ healthcare needs.

This article is for informational purposes only and shouldn’t be taken as tax or legal advice. If you have questions about Form 8941, consult with a tax professional.

1. https://www.irs.gov/pub/irs-pdf/f8941.pdf

2. https://www.irs.gov/pub/irs-pdf/f990t.pdf

3. https://www.healthcare.gov/small-businesses/provide-shop-coverage/small-business-tax-credits/

4. https://www.irs.gov/instructions/i8941#en_US_2023_publink10008731:~:text=CMS.gov.-,Exception%20for%20eligible%20small%20employers%20in%20certain%20counties.,-For%20calendar%20year

5. https://irsextension.online/ 

6. https://www.irs.gov/instructions/i8941#en_US_2023_publink10008731:~:text=Totals%3A-,Column%20(a)%2C%20Individuals%20Considered%20Employees,-Enter%20the%20name

7. https://www.irs.gov/pub/irs-pdf/i8941.pdf

8. https://www.irs.gov/pub/irs-pdf/f3800.pdf