This article has been reviewed by tax expert Erica Gellerman, CPA.
IRS Form 8941 isn’t the simplest of tax documents to fill out. However, if you are eligible, it's wise to take advantage of this small-business tax credit. If you need help, consult a bookkeeper or certified public accountant (CPA). Taking time to complete IRS Form 8941 carefully and accurately will guarantee that you get the maximum small-business health care tax credit possible.
What is IRS Form 8941?
When it comes to small-business taxes, the only thing small-business owners enjoy more than tax deductions is tax credits. Tax deductions only allow you to decrease the amount of income subject to your tax rate, whereas tax credits allow you to decrease the amount of tax due, which often saves you more money than a tax deduction.
A popular small-business tax credit available is the small-business health care tax credit. IRS Form 8941 is submitted by small-business owners to claim the small-business health care tax credit. The small-business health care tax credit allows small-business owners to claim a tax credit on insurance premiums the employer paid during the tax year for their employees’ health insurance coverage through the Small Business Health Options Program (SHOP) Marketplace. Form 8941 comprises roughly 23 questions.
IRS Form 8941 overview
IRS Form 8941 is what small-business owners will use to claim the small-business health care tax credit. This tax credit was created as part of the Affordable Care Act (ACA) as a way to incentivize small-business owners to provide health insurance to their employees.
According to the IRS, the maximum credit a small business can claim is a percentage of the premiums the employer paid during the tax year for their employees’ health insurance coverage provided through the Small Business Health Options Program (SHOP) Marketplace.
The maximum credit is:
50% of premiums paid for small-business employers.
35% of premiums paid for small tax-exempt employers.
There are strict eligibility requirements for who can claim this credit, but generally speaking, the smaller the employer, the larger the credit. If you’re tax-exempt and have no taxable income, you may be eligible to receive the credit as a refund.
Types of businesses that are eligible to file IRS form 8941 to claim the small-business health care tax credit are partnerships, S-corporations, cooperatives, estates, trusts and tax-exempt eligible small employers.
Who can file IRS Form 8941?
In order to be eligible for the small-business health care tax credit, you must meet the following three requirements:
Employ less than 25 full-time employees for that tax year: This number excludes sole-proprietorship owners, partners in a partnership, a shareholder of an S-corporation that owns more than 2%, the owner of more than 5% of the business or other businesses and the family members of any of these types of employees. You also won’t include the premiums paid on behalf of these employees to determine the amount of your health care tax credit.
Average wage paid to each employee is less than $54,000 (adjusted annually for inflation): So, for example, if you pay total annual wages of $200,000 to your 10 full-time employees, you divide $200,000 by 10 to determine your average annual wage. In this case, the average annual wage would be $20,000 and would meet the requirement.
You paid premiums for employee health insurance coverage under a qualifying arrangement: The IRS defines a qualifying arrangement as “an arrangement where you pay at least 50% of the cost of employee-only — not family or dependent — health care coverage for each employee.”
Offer a health insurance plan through the Small Business Health Options Program (SHOP) marketplace (there are limited exceptions to this.)
Note that a small-business owner can only claim this tax credit for two consecutive years. If your small business does not owe tax during a year that you file, you can carry the credit back or forward to other tax years. If your business is tax-exempt, you may be eligible for a tax credit refund. Also, since the amount of the health insurance premium payments is more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit.
The credit amount you are eligible for may also be reduced depending on your specific business situation. The maximum credit amount of 50% is reduced if you have more than 10 employees, your average annual wages exceed $25,800 or your health insurance premiums exceed the average premiums paid for health coverage in your geographical area.
Your credit may also be reduced if you’re entitled to a state tax credit or a state premium subsidy for health insurance coverage you provide to your employees. This is because the amount of your tax credit can’t be more than your net premium payments.
IRS Form 8491 instructions
IRS Form 8941 should be included as part of your annual business tax return. If you’re claiming additional tax credits, you must submit IRS Form 8941 along with IRS Form 3800 and your tax return.
Now that you know all about the small-business health care tax credit, let’s learn how to claim it on your business tax return. IRS Form 8941 comprises three questions and 20 lines in which you will calculate your tax credit.
Line A is simply asking if you paid health insurance premiums for coverage provided by your business to your employees through the SHOP Marketplace. If the answer is “yes” enter the Marketplace identifier, if any, then continue to Line B. If the answer is “no,” you probably shouldn’t be filing IRS Form 8941 unless you meet the following classification, as defined by the IRS:
“If you answer ‘No,’ don’t file Form 8941 unless you’re filing it for a partnership, S-corporation, cooperative, estate, trust or tax-exempt eligible small employer that received from another entity a credit that must be reported on line 15.”
On line B, provide the IRS with your employer identification number (EIN).
On line C, answer “Yes” if a tax return you filed for a tax year beginning in 2014, 2015, 2016 or 2017 included a Form 8941 with line A checked “Yes” and line 12 showing a positive amount. If this is the case, the IRS says again “not to file Form 8941 unless you’re filing it for a partnership, S-corporation, cooperative, estate, trust or tax-exempt eligible small employer that received from another entity a credit that must be reported on line 15.”
To complete lines 1 through 3 of IRS Form 8941, you’ll need to complete worksheet 1, which is provided by the IRS in their instructions:
In column A, you’ll provide the names of all your employees (including former employees, seasonal employees and contractors). Then, take the total number of employees you employed during the tax year for which you are seeking this credit and enter it in line 1.
In column B, you’ll enter the total hours of service for the tax year for each employee listed in column A. Before completing column C, you’ll need to first complete worksheet 2 (also provided in the IRS instructions).
Once you have determined your number of full-time equivalent employees, enter that number on line 2. Do not complete column C if worksheet 2, line 3, is 25 or more. To complete line 3, you’ll need to use worksheet 3:
Once you have determined average annual wages, enter it on line 3.
The next step is to complete worksheet 4, which helps you find the numbers to input in lines 4 through 12.
In column A, you’ll put the names of each individual listed in column A of worksheet 1 who was enrolled in health insurance coverage you provided to employees during the tax year. In column B, enter the total employer premiums paid for the tax year for each employee listed in column A. This total will be entered on line 4.
For column C, you’ll need to find the table called “Average Premiums Needed to Figure Adjusted Amounts on worksheet 4” in the IRS instructions and use them to figure out the adjusted average premium in column C. This total will be entered on line 5. The smaller of the numbers entered on line 4 and line 5 will then be entered on line 6. Next, you’ll multiply the total from line 6 by 35% for tax-exempt businesses and 50% for all other types of businesses. The resulting calculation will be entered on line 7.
In line 8, if the number you entered in line 2 is 10 or less, enter the amount from line 7. If not, enter the amount from worksheet 5, line 6, provided below:
If the number you entered in line 3 is $27,000 or less, enter the amount from line 8 in line 9. Otherwise, enter the amount from worksheet 6, line 7, provided below:
On line 10, enter the total amount of any state premium subsidies paid and any state tax credits available to you for premiums included on line 4. Then subtract that number from the number on line 4 to get line 11. Finally, enter the smaller of the numbers between line 9 and line 11 in line 12.
Before moving on, don’t forget to fill out column D of worksheet 4. In order to do this, enter the amount from column B of worksheet 1 for each employee listed in column A of worksheet 4. Note that you shouldn’t complete column D if line 12 is zero.
If line 12 is zero, skip lines 13 and 14 and go to line 15.
Otherwise, enter the number of employees included on line 1 for whom you paid premiums during the tax year for health insurance coverage. This is also the total from worksheet 4, column A. On line 14, enter the number of full-time employees you would have entered on line 2 if you only included employees included on line 13 (the number calculated in worksheet 7, line 3).
On line 15, enter any credit for small employer health insurance premiums from:
Schedule K-1 (Form 1065), box 15 (code P).
Schedule K-1 (Form 1120S), box 13 (code P).
Schedule K-1 (Form 1041), box 13 (code G).
Form 1099-PATR, Taxable Distributions Received From Cooperatives, box 10 or other notice of credit allocation.
On line 16, add together the sum from lines 12 and 15. However, cooperatives, estates and trusts will skip line 16 and go to line 17. Tax-exempt small employers will skip lines 16, 17 and 18 and go to line 19. Partnerships and S-corporations will report the amount in line 16 on Schedule K-1. All other businesses will report the total on line 16 on Form 3800, part 3, line 4h.
Estates and trusts that skipped line 16 will determine the amount allocated to patrons of the cooperative or beneficiaries of the estate or trust and enter that amount on line 17. The IRS instructions have more advice on how to do this. Estates and trusts will then subtract line 17 from line 16 and enter that amount on line 18. This is the amount they will report to the IRS on Form 3800, part 3, line 4h.
The last two lines are for tax-exempt employers. On line 19, employers will enter the total amount of certain payroll taxes. This includes:
Federal income taxes the tax-exempt employer was required to withhold from employees’ wages in the previous tax year.
Medicare taxes the tax-exempt employer was required to withhold from employees’ wages in the previous tax year.
Medicare taxes the tax-exempt employer was required to pay in the previous tax year.
Finally, on line 20, tax-exempt employers will enter the smaller number between line 16 and line 19. This number will also be reported on Form 990-T, line 50f.
A version of this article was first published on Fundera, a subsidiary of NerdWallet.