P.A.I.D.
All credits
Section 45R

The Small Business Health Care Credit

If you're a small employer who pays toward your team's health insurance premiums, the federal government may reimburse up to half of that cost as a tax credit - but a single extra hire can push you off a cliff and erase it.

In a nutshell

  • Covers up to 50% of the health-insurance premiums a small employer pays for its employees.
  • You must have fewer than 25 full-time-equivalent (FTE) employees and pay at least 50% of premium cost.
  • The credit phases out as you approach 25 FTEs or as average annual wages rise above the $34,100 (2026) base limit.
  • Our Blind Spot Radar warns you before headcount crosses the 25-FTE cliff that wipes the credit out entirely.
  • It's claimed on IRS Form 8941, which flows into the General Business Credit (Form 3800).

What is the Section 45R credit?

Section 45R is the Small Business Health Care Tax Credit. It rewards small employers for contributing to their employees' health-insurance premiums. The smaller your team and the lower your average wages, the larger the credit - it's designed to help the businesses for whom offering coverage is hardest.

How the math works

50%
Maximum base credit
of the premiums you pay for employees
< 25
FTE ceiling
25 or more full-time-equivalents disqualifies you entirely

Step 1 - FTEs. Add up all employee hours (capped at 2,080 per person) and divide by 2,080, rounding down. That's your full-time-equivalent count.

Step 2 - Average wage. Divide total wages by your FTE count.

Step 3 - Phaseout. The 50% base credit shrinks on two axes: it phases out between 10 and 25 FTEs, and as average wages rise from $34,100 toward roughly twice that. Cross 25 FTEs and the credit is gone.

Worked example

You have 8 FTEs, an average wage of $30,000, and pay $60,000 in employee premiums (60% of cost).

  • • Base credit: 50% × $60,000 = $30,000
  • • Under 10 FTEs and under $34,100 avg wage → no phaseout
  • • Estimated §45R credit: $30,000

The 25-FTE cliff (don't get blindsided)

§45R is all-or-nothing at 25 FTEs. A single seasonal hire or stretch of overtime can tip you over and erase a five-figure credit. P.A.I.D.'s Blind Spot Radar tracks your FTE count in real time and flags you the moment you approach the cliff - so the loss is a choice, not a surprise.

Who and what qualifies

Fewer than 25 FTEs

Counted across your whole controlled group of related entities - a detail that trips up franchise and multi-entity owners.

At least 50% of premiums paid

You must cover a uniform percentage - no less than half - of the premium cost for enrolled employees.

Average wages under the limit

The credit phases out as average annual wages climb above $34,100 (2026), reaching zero near twice that.

Do you qualify? The real limits

The bright-line tests and the things that quietly disqualify a business (2026 tax year).

Full-time-equivalent employees
Fewer than 25 (full credit at ≤10, phasing out to zero at 25)
Average annual wages (2026)
Phase-out starts $34,100; fully gone around $68,200
Employer premium share
At least 50%, uniform across employees
Coverage source
Must be a SHOP-Marketplace plan
Credit period
Only 2 consecutive years; rate 50% (35% for tax-exempts)

What can disqualify you

  • Owners, partners, >2% S-corp shareholders, >5% owners - and their family members - are excluded from all counts.
  • Seasonal workers (120 days or fewer) are excluded.
  • Related businesses under common control are combined for the under-25-FTE test (controlled-group aggregation).
  • A QSEHRA or individual-coverage HRA does not qualify - it must be SHOP group coverage.

Common reasons businesses get denied

  • No SHOP plan is available in the area - SHOP enrollment collapsed in most states, so there's often no qualifying plan to buy.
  • 25 or more full-time-equivalent employees once related entities are combined.
  • Average annual wages above the ~$68,200 (2026) full phase-out ceiling.
  • Employer pays less than 50%, or not the same percentage for everyone.
  • Already claimed in 2 consecutive years - the credit is gone after that.
  • Coverage is a QSEHRA / individual-coverage HRA instead of SHOP group coverage.

Even if you qualify

  • If you've already claimed it for 2 consecutive years, no further credit is allowed.
  • Your premium deduction is reduced by the credit (§280C(h)).
  • Nonrefundable for taxable employers (General Business Credit liability limit applies).

Check your state

State figures as of June 2026; many are indexed and change mid-year. Confirm with your state labor department and CPA.

Limits that apply to every federal credit

They're nonrefundable
Every credit here offsets income tax but can't create a refund (§38 liability limit). A business with little or no tax liability gets little benefit this year - unused amounts carry back 1 year and forward up to 20 (§39).
Related businesses are combined
If you own multiple businesses under >50% common control, the IRS treats them as ONE employer for the size tests (§52/§414). Several small entities can together blow past the under-25-FTE, 30-employee, or 100-employee ceilings even though each looks small alone.
No double-dipping
The deduction for the wages/premiums/expenses behind a credit is reduced by the credit amount (§280C), and the same dollar can't fund two different credits.
Pass-through & passive limits
For S-corps and partnerships the credit flows to owners on a K-1, where each owner's liability and passive-activity limits (§469) decide how much they can actually use.

Plain-English summary, not tax advice. Your CPA confirms eligibility for your specific business.

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