Up to 50% Off Health Premiums: The Tax Credit Salons Keep Missing

A salon that pays $50,000 a year in group health premiums can pull $25,000 back from the IRS through the Small Business Health Care Tax Credit, and $50,000 across the two-year window the credit allows. Attorney Leticia Skrabut, Esq., of AzarvandTaxLaw, walks through who qualifies and how the math actually works for owners of for-profit salons, spas, and beauty businesses.

Who clears the bar?

Two thresholds gate the full credit: 10 or fewer full-time equivalent employees, and average annual wages of $34,100 or less per FTE. The 2026 wage ceiling for partial credit sits at $68,200, with 25 FTEs as the cap for any credit at all. Skrabut frames the trade this way: "Wouldn't it be nice to get a tax break for doing right by them? Through the Small Business Health Care Tax Credit, eligible businesses can do exactly that."

The credit reimburses up to 50% of premiums for for-profit employers and up to 35% for tax-exempt organizations. It sits inside the general business credit, so an unused portion can carry back one year and forward up to 20 years. Premiums the credit does not cover stay deductible as a business expense, which lets a qualifying employer stack the credit and the deduction in the same year.

How do FTEs actually count?

The owner of a sole proprietorship, a partner, an S-corp shareholder owning more than 2%, any owner with more than 5% of the business, and certain family members of those individuals drop out of the FTE count. One FTE equals 2,080 hours per year; any hours over that ceiling drop out of the calculation. Seasonal employees who work 120 or fewer days each year do not count toward FTEs, but premiums paid on their behalf still feed the credit.

A worked example: a 10-person salon has one owner with more than 5% of the business, who is excluded. The remaining 9 employees each work 2,000 hours, for 18,000 hours total. Dividing 18,000 by 2,080 yields roughly 8.65 FTEs. Two seasonal workers, each on the floor for 100 days, drop out of the FTE count but their premiums still count. Total wages of $260,000 divided by 8.65 FTEs produce an average annual wage of about $30,058, which rounds down to $30,000, well under the $34,100 full-credit floor.

What does SHOP and Section 125 change?

The employer must offer coverage through a Small Business Health Options Program Marketplace or qualify for a limited exception. At least 50% of the cost of employee-only coverage has to come from the employer. A Section 125 cafeteria plan does not disqualify an employer, but employee salary-reduction payments do not count as employer-paid premiums. The IRS bars "double dipping" because those dollars are already exempt from federal income and payroll taxes; only the employer's own contribution to the premium qualifies.

How does the phaseout work?

The credit shrinks on a sliding scale once the employer crosses 10 FTEs or once average annual wages clear half the $68,200 ceiling. The full 50% only applies at or below the floor. A qualifying employer with 10 FTEs that pays $25,000 in premiums can claim $12,500; the same employer as a tax-exempt organization claims $8,750. The credit is computed on the lesser of premiums paid or the average small-group market premium for the rating area, so a generous plan does not automatically produce a larger credit.

How do you claim it?

For-profits file Form 8941, "Credit for Small Employer Health Insurance Premiums," and carry the figure onto the general business credit section of the income tax return. Tax-exempt organizations report the credit on Part III of Form 990-T, on the line the IRS designates for that year. The two-year clock starts the first taxable year the employer files an income tax return with Form 8941 attached, so an employer that has never claimed the credit still has both years ahead of it. The credit can also be claimed retroactively by filing an amended return, subject to a refund-claim window of three years from when the original return was filed or two years from when the tax was paid, whichever is later. Refundable amounts paid to tax-exempt employers are subject to sequestration, recently running at 5.7%.

What should owners watch next?

The IRS resets the wage ceiling each year for inflation, while the FTE thresholds stay put. Salon owners weighing whether 2025 or 2026 returns qualify should run the FTE math now, before the next filing season, and confirm their state-level access to a SHOP plan — some states operate their own SHOP programs while others route employers to the federal marketplace.