Health insurance can feel like a double-edged sword to many small business owners in California. While offering benefits is often sited as the single most effective way to attract and retain top talent, it’s also a major expense. Rising premiums, especially when they rise year after year, can quickly eat into your bottom line.
What you may not know is that the federal government offers financial assistance with insurance costs through the Small Business Health Options Program (SHOP). This allows eligible employers to claim the small business health care tax credit, which can potentially cut your premium costs in half.
If you’re not taking advantage of this, you may be leaving money on the table every year. Unfortunately, due to how complex health insurance rules and tax codes can be, it’s easy to overlook something or assume you don’t qualify. The team here at JC Lewis has put together a basic guide that will help cut through this confusion and make it clear if you qualify and, if you do, how you take advantage of offering health coverage through programs such as Covered California for Small Business owners.
The “Do I Qualify?” Checklist
The first question most business owners have is “do I even quality for this?” In order to claim the small business health care tax credit, you do have to purchase a certified health plan through the SHOP Marketplace, which is called Covered California for Small Business owners. In order to determine if you qualify, ask yourself these questions:
- Do you have fewer than 25 full-time equivalent (FTE) employees? Before saying no, remember that FTE employees do not necessarily have to work 40 hours. The keyword is “equivalent.” Part-time employees count towards this on a pro-rate basis, though the business owners, partners, and immediate family members typically cannot be counted.
- Are your average employee wages around $67,000 or less? This annual salary threshold is adjusted every year for inflation, so be sure to check for the current figure. In 2026, the exact figure is $68,200.
- Do you pay at least 50% of your full-time employees’ health insurance premiums? You must contribute at least half of the employee-only premium costs to qualify. Note this requirement is ONLY for employee coverage. You are not required to contribute to premiums for employee spouses or dependents.
- Do you offer SHOP coverage to all of your full-time employees? Again, you don’t have to offer it to spouses or dependents, but all of your employees who work at least 30 hours a week must have the option of coverage.
If you answer yes to all four questions, you likely qualify for a tax credit.
How the Tax Credit Scales: The Smaller, the Better
The small business health care tax credit uses a sliding scale. This means that very small businesses with very low average salaries will receive more financial relief than larger companies.
To receive the maximum tax credit, which is 50% for for-profit businesses and 35% for tax-exempt non-profit organizations, you have to have ten or fewer FTE employees, and their average annual wages must be around $34,000 or less. Again, this number is adjusted for inflation every year. In 2026, the exact figure is $34,100.
However, even if you don’t meet those requirements, you can still receive a partial tax credit. If you have between 10 and 25 FTE employees, or if your average wages are higher than the limit ($68,200 in 2026), your credit will be adjusted on a sliding scale. This means it’s worth looking into even if you can’t get the maximum amount.
One thing to remember: this tax credit is only available to employers for two consecutive tax years. Once you’ve claimed your Covered California for Small Business credit for two consecutive tax years, you won’t be able to claim it again.
Example Calculation: Seeing the Savings in Action
Let’s take a look at a couple of different scenarios to see how this tax credit can help you.
| The Maximum Credit | The Sliding Scale Credit | |
| Number of FTE Employees | 8 | 18 |
| Average Annual Wages | $30,000 per employee | $45,000 per employee |
| Total Annual Employer Premium Cost | $40,000 | $90,000 |
| Employer Contribution Percentage | 60% of employee premiums | 50% of employee premiums |
| Eligible Tax Credit Percentage | 50% (full credit) | Approx. 20% (Due to number of FTE employees) |
| Estimated Annual Tax Savings | $20,000 | $18,000 |
| Net Cost to You | $20,000 | $72,000 |
As you can see, even if you don’t qualify for the maximum rebate, you can still save thousands of dollars with the partial credit.
Why Use Covered California for Small Business (CCSB)?
In addition to the tax credits, Covered California for Small Business offers a few other advantages:
Employee Choice
In traditional small group health plans, the employer selects a single insurance carrier. All of the employees then have to use this network. With CCSB, however, you can offer multi-carrier or dual tier options. This means employees can choose their specific carrier and network that fits their needs, while you pay a single, consolidated invoice.
Keeping the Budget Under Control
You can set a defined contribution amount. To do this, you first select a baseline reference plan and decide what percentage of that plan’s premium you will cover (with a minimum of 50%). If an employee decides that need a higher-tier plan or a more expensive network, they can choose that plan/network, but they then have to pay the difference via a pre-tax payroll deduction. This gives employees access to the care they want but keeps your expenses completely predictable.
Enrollment Flexibility
Individual health insurance plans have very strict open enrollment periods, but with CCSB, small businesses can apply for coverage at any time.
Avoid the Guesswork: Partner with a California Benefits Specialist
Calculating your full-time equivalent, averaging your seasonal payroll hours, determining your eligibility, and comparing carrier options can be a lot of work, especially for a small business owner navigating the process for the first time. If you accidentally miscalculate your FTE or set the wrong contribution, you may accidentally disqualify your business from receiving a tax credit.
If your business is close to the FTE or wage threshold, do not guess. J.C. Lewis can review your group details, identify whether SHOP belongs in the comparison, and help coordinate next steps with your tax professional.
We’ve helped California employers navigate group health benefits for decades. We’ll run market comparisons, help you understand ACA compliance, and ensure that you receive every dollar of tax relief you’re eligible for. Contact us today to learn more.
