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The Small Business Health Care Tax Credit


Average Annual Wages

You can find the average annual wages you paid to your FTEs by dividing the total wages you paid to all your employees (other than the employees that aren't counted) by the number of your FTEs.

However, only count the wages subject to Social Security and Medicare withholding, disregarding the wage base limit.

The credit will begin to phase out if the average annual wages are more than $25,000, and falls to zero when the wages reach $50,000. This phaseout is in addition to the FTE phase out on the previous page.

Like your FTEs, some of your employees receive special treatment and some are not counted at all when determining your average annual wages.

Employees Receiving Special Treatment

Leased Employees

If you employ people from a leasing organization, premiums paid by the organization are not counted when computing your credit.

Under certain circumstances, leased employees don't count at all.

Seasonal Employees

If you have seasonal employees that work for you 120 days out of the year or fewer, wages paid to them are not included. However, the premiums you pay for their insurance coverage count in computing your credit.

Household and Other Nonbusiness Employees

If you are a sole proprietor, these employees are included with your business employees when computing the credit.


For Social Security and Medicare purposes, a minister performing services in the exercise of his or her ministry is treated as self-employed. This means their wages don't count in your average annual wages even if the ministers are counted as employees.

Employees Not Counted

Certain types of employees are not considered employees for purposes of the credit and are not included when calculating your wages in the same way they are not counted in finding your FTEs:

  • The owner of a sole proprietorship,
  • A partner in a partnership,
  • A shareholder who owns (after appyling the section 318 constructive ownership rules) more than 2% of an S corporation,
  • A shareholder who owns (after applying the section 318 constructive ownership rules) more than 5% of the outstanding stock or stock possessing more than 5% of the total combined voting power of all stock of a corporation that is not an S corporation,
  • A person who owns more than 5% of the capital or profits interest in any other business that is not a corporation, and
  • Family members or a member of the household who is not a family member but qualifies as a dependent on the individual income tax return of a person listed above. Family members include:
    • A spouse,
    • A child (or descendant of a child),
    • A sibling or step-sibling,
    • A parent (or ancestor of a parent),
    • A step-parent,
    • A niece or nephew,
    • An aunt or uncle, or
    • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.