What is Form 8941?
IRS Form 8941 is used to claim the Small Employer Health Insurance Credit. It's the tax form that must be completed and attached to your tax return to calculate and claim the credit.
The Small Employer Health Insurance Credit allows qualifying small businesses to receive up to 50% of their health insurance premiums paid in a tax year as a refundable tax credit. Since it’s a refundable tax credit, you’re eligible to receive a tax refund if it decreases your tax bill below $0.
The purpose of the credit is to assist eligible small employers in providing health insurance coverage to their employees. It’s designed such that the credit scales down as the number of employees or average wages increases, thus having the most benefit for smaller operations.
If you have five full-time equivalent employees averaging $25,000 in wages one year and the next you increase to ten full-time equivalent employees averaging $30,000, your credit amount reduces. Because of this, it’s best to take advantage of the credit in the early stages of your small business.
Businesses can only claim the tax credit in two consecutive tax years.
Five things to know about Form 8941
Before we start digging into the details, let's outline five key points you should know to decide whether you should dedicate time to Form 8941:
- To qualify for the credit, your average wages must be below a set amount. This amount was $58,000 for the 2022 tax year and it gets announced before the tax filing period annually.
- Another qualification is employing fewer than 25 full-time equivalent employees.
- You can only claim the the tax credit in two consecutive years.
- If you're filing Form 8941, you must also file Form 3800.
- To fill out the form, it's best to complete the seven worksheets in the IRS-provided instructions
Who is eligible to claim the Small Employer Health Insurance Credit?
The Small Employer Health Insurance Credit is only available to businesses that offer a qualified health insurance coverage plan through the Small Business Health Options Program Marketplace. At least 50% of the cost of health care coverage for each employee must be covered by the employer.
To qualify for the credit for a small employer, the average wages paid out per employee cannot be more than an amount that’s set each year. For the 2022 tax year, the amount was $58,000. Additionally, the business must employ fewer than 25 full-time equivalent employees.
Full-time equivalent employees (FTE) mean how many people you could hire for full-time work given the total hours worked. For the purpose of the credit, an FTE is defined as 2,080 hours per year (40 hours per week).
There are some exceptions about whose hours to include in the calculation. In your calculation, you cannot include any health insurance premiums or hours worked for:
- Owners of a sole proprietorship
- Partners in a partnership
- Shareholders of S corporations owning more than 2%
- Owners of more than 5% of the business or other businesses
- Family members of the above
Seasonal employees who work 120 days or fewer in the tax year are not included in the FTE calculation. But the health insurance premiums paid for these employees are still counted in calculating the credit.
Instructions for filling out Form 8941
Before you start filling out Form 8941, it’s recommended you complete the 7 worksheets in the IRS-provided instructions. Each worksheet helps you fill in detailed information for specific lines on the form itself.
Worksheet 1 helps you break down the total hours worked and wages paid for each eligible employee. The total count of employees listed is used on Line 1 of Form 8941. Find your employee and payroll information in your payroll processor or past payroll records.
Worksheet 2 is the FTE calculation. Use the total employee hours of service from worksheet 1 and divide by 2,080. You’re left with your FTE count. Enter it in line 2 of Form 8941.
Worksheet 3 helps you find the average annual wages per FTE. Take the total wages paid from worksheet 1 and divide by the FTE count calculated in worksheet 2. Enter the final result in line 3 of Form 8941.
Worksheet 4 is where you start tallying up the employer paid portion of the health insurance premiums and hours worked for enrolled employees only.
Columns (a), (b), and (d) are all straightforward; this information is likely found in your payment processor or past payroll records.
For column (c), you must find the average premium based on your location. This information is found on pages 10 through 30 of the instructions. If your business operates in multiple locations, make sure to double-check check you are using the right location for each employee. Once complete, fill in lines 4, 5, and 13 on Form 8941.
Before moving on to the next worksheet, fill in any blanks on Form 8941 from line 1 through 13 except for lines 8 and 9. The rest of the worksheets only need to be completed if you meet certain conditions.
If the value you entered in Line 2 on Form 8941 is greater than 10, you won’t qualify for the full credit amount. By completing worksheet 5, you’ll find the credit amount you’re eligible to take.
Start with the applicable percentage and the FTE count, as recorded on line 7 and 2 of Form 8941 respectively.
Subtract 10 from the FTE count; what’s left is how many FTE over the limit of 10 you have.
Divide this amount by 15 before multiplying it by the percentage you recorded on line 7. Subtract this amount from the initial percentage and you get the percentage of the health insurance premiums paid you’re eligible to take as a credit.
Similarly, you aren’t eligible to take the full credit if the average annual wages amount you reported is greater than $28,000. If greater than $28,000, you must complete worksheet 6.
Start with the percentage you calculated in worksheet 5. Then enter the initial percentage amount and the average annual wages.
Subtract $28,700 from your average annual wages amount, then divide by $28,700. Multiply the initial percentage (as reported on line 7) by this decimal value. Then subtract this calculated value from the initial percentage amount. The result is recorded on line 9 of Form 8941.
Finally, there’s worksheet 7, which is required to complete line 14 of Form 8941 if line 12 is more than 0. This is similar to worksheet 2 however this time you are only including employees who are enrolled in the insurance program.
Once this worksheet is complete, put the calculated value into line 14 of Form 8941. Review any unfinished lines to complete the form and find your final credit amount.
What's the value of completing Form 8941?
The maximum credit value is 50% of the health insurance premiums paid for employees.
Every dollar of a tax credit reduces your tax bill by a dollar. If your calculated Small Employer Health Insurance Credit is $10,000, you save $10,000 on your tax bill.
The credit is unique in that if it reduces your tax bill past zero, the amount of credit can be applied to a prior or future tax year. For a $10,000 credit on a $6,000 tax bill, that means $4,000 in savings that can apply to another tax filing.
For any health insurance premiums in excess of the credit, that's still a tax deductible expense. For a $10,000 credit on $20,000 of health insurance premiums, the remaining $10,000 is a tax deduction.
Simply put, there's lots of tax savings to be had if small businesses qualify and are willing to put in the work, and these benefits can last beyond the tax year you're filing for.
Form 8941 and Form 3800
If you’re claiming the Small Employer Health Insurance Credit, Form 8941 is half the forms you're responsible for filing. The other half is Form 3800 which businesses use to claim any of the general business credits.
You’re responsible for filing a copy of Form 3800 for each of the general business credits you are claiming. It states the amount of the credit reported on the original return, the amount that’s allowed, and any amount that will carry forward.
Other tax credits and deductions for small businesses
Now that you know how to claim one tax credit that can save you money, you can shift your focus to other credits and deductions to ensure you don’t leave a single cent on the table.
We’ve compiled a list of 17 big tax deductions and a comprehensive guide of small business tax credits.
Claiming tax credits and deductions requires up-to-date and comprehensive bookkeeping and accounting. Whether it’s taking a DIY approach or hiring a professional (like Bench), track how you’re spending your money throughout the year to maximize your tax bill savings.
