What You Need to Know About the Small Business Health Insurance Credit

The childcare health insurance credit is one of the most overlooked tax breaks available to small childcare business owners. If you cover health insurance premiums for employees enrolled in a qualified health plan, you may be eligible for a federal tax credit worth thousands of dollars. In this guide, we walk through what the credit is, who qualifies, and how to actually claim it. Read on to learn more.

What Is the Childcare Health Insurance Credit?

Offering health insurance to your childcare team isn’t cheap. The cost can be especially heavy for small businesses, which is exactly why the Affordable Care Act of 2010 created incentives to help. The Small Business Health Insurance Credit — what we’ll call the childcare health insurance credit throughout this article — is one of those incentives.

It’s a federal tax credit available to qualified small employers who pay their employees’ health insurance premiums. The credit operates on a sliding scale, so the larger the employer, the smaller the credit. It’s available to qualified businesses and to small tax-exempt organizations.

Who Qualifies for the Childcare Health Insurance Credit?

So how do you know if you qualify? The IRS Small Business Health Care Tax Credit page outlines four requirements:

Your business must employ fewer than 25 full-time equivalent (FTE) employees.
Your business must pay average annual wages below an inflation-indexed cap per FTE. (The cap was originally $50,000 and now adjusts each year — confirm the current year’s number on the IRS page above.)
Your business must offer a qualified health plan to your employees through the Small Business Health Options Program (SHOP) Marketplace.
Your business must pay at least 50% of the cost of employee-only (not family or dependent) health coverage for each employee.

You can learn more about qualified plans offered through the SHOP Marketplace at HealthCare.gov. If you’re not sure how to count your FTEs, our companion article on calculating full-time equivalency for childcare walks through the math step by step.

Who Does Not Qualify?

The IRS also identifies categories of people whose insurance premiums you can’t include when calculating the credit. Even if your business otherwise qualifies, you must exclude premiums paid on behalf of:

The owner of a sole proprietorship
A partner in a partnership
An S corporation shareholder owning more than 2%
Anyone owning more than 5% of the business or another business
Family members of any of the above

As a result, you may only qualify for the childcare health insurance credit when you remove these categories from your FTE and wage calculations. This is the place we see the most owner confusion, so it’s worth double-checking before you file.

How to Claim the Childcare Health Insurance Credit

If your small childcare business meets the requirements above, you’ll claim the credit on Form 8941, Credit for Small Employer Health Insurance Premiums.

Form 8941 walks you through two key calculations:

Full-time equivalency. First, count the FTE employees whose premiums you’ll include in the credit calculation.
Average annual wages. Next, calculate the average annual wages you pay across those employees.

Once those numbers are in place, the form steps you through the credit math.

Don’t Stop at One Credit

The childcare health insurance credit is one of several federal incentives childcare owners often miss. As you review your tax position, also look at:

The Employee Retention Credit for eligible wages paid in qualifying periods.
The Work Opportunity Tax Credit for hires from targeted groups.
The Qualified Business Income (QBI) Deduction if your entity type qualifies.
The full list of top tax deductions for childcare businesses.

Stacked together, these can meaningfully reduce your annual tax bill.

Get Help From a Childcare CPA

Feeling overwhelmed by FTE counts, average annual wages, and Form 8941? The tax experts at Honest Buck Accounting can help. Schedule a call with one of our friendly, professional accountants and find out how we help childcare business owners like you uncover every credit you’re entitled to — including the childcare health insurance credit.