Tax credits represent one of the most powerful ways for small business owners to reduce their tax liability. But with new laws taking effect and rules changing year to year, it can be hard to know which credits apply to your business.

This guide breaks down the small business tax credits for most employers and highlights the expanded opportunities coming in 2026 under the One Big Beautiful Bill Act (OBBBA). The credits covered include:

• Small Employer Health Insurance Credit

• FICA Tip Credit (expanded in 2025)

• Small Employer Retirement Plan Credits (SECURE 2.0)

• Paid Family and Medical Leave Credit (permanent in 2026)

• Employer-Provided Child Care Credit (expanded in 2026)

• Direct Primary Care and HSA Compatibility (2026 change)

• Disabled Access Credit

How Tax Credits Work

Tax credits aren’t one-size-fits-all. Each one targets a different kind of employer investment, and knowing which credits apply to your business can mean the difference between paying full price and saving thousands of dollars on your tax bill.

Whether you cover employee health insurance, provide family leave, support child care, or operate in a tipping industry, certain credits reduce your taxes dollar-for-dollar.

For example, if a restaurant qualifies for a $15,000 FICA tip credit, that’s $15,000 directly off its tax bill—not just a reduction in taxable income.

Caroline Nguyen, Town’s Tax Manager, notes: “Credits are very different from deductions. A $10,000 deduction might save you $2,400 in tax, but a $10,000 credit saves you the full $10,000. Many business owners don’t realize just how powerful these credits are until we run the numbers side by side.”

Small Employer Health Insurance Credit — Up to 50% Back on Premiums

For many small businesses, this is one of the most valuable credits—potentially covering up to half of what you pay toward employee health insurance premiums.

Eligibility Requirements:

• Fewer than 25 full-time equivalent (FTE) employees

• Average annual wages at or below $33,300 to receive the full credit

• Credit phases out as average wages rise, fully disappearing at $66,600

• Full credit is also limited to 10 or fewer FTEs, and phases out completely once you reach 25 FTEs

• Employer pays at least 50% of employee premium costs

• Coverage is offered through a SHOP (Small Business Health Options Program) marketplace plan

Credit Amount:

• Up to 50% of premiums paid for practices with 10 or fewer FTEs and average wages of $33,300 or less

• Percentage phases down as FTEs increase from 11–25 and/or average wages climb from $33,300 up to $66,600

• No credit once you exceed either 25 FTEs or the $66,600 wage ceiling

Example: A 12-employee architecture firm with average wages of $45,000 pays $84,000 annually toward SHOP health insurance premiums. With both the FTE and wage phase-outs applied, the business qualifies for a credit of about 26%—roughly $21,600—directly reducing its 2025 tax bill. The remaining premiums are still deductible as a business expense.

Caroline Nguyen explains: “We often see businesses underestimate how powerful this credit can be. Even a mid-sized team with average wages in the $40,000s can capture a meaningful percentage back. But the catch is that it’s only available for two consecutive years—so timing your eligibility is everything.”

Key Details:

• Available for two consecutive tax years once you qualify

• Refundable for tax-exempt employers

• Excess credit can be carried back or forward under general business credit rules

• Common pitfall: Non-SHOP group insurance doesn’t qualify

Note: These eligibility thresholds remain the same after 2025—there are no OBBBA changes to this credit in 2026.

Quick SHOP Checklist:

• Count full-time equivalent employees (FTEs), not just headcount

• Confirm average annual wages against the $33,300–$66,600 phase-out range

• Ensure the business pays at least 50% of premiums

• Verify coverage is through a SHOP marketplace plan

FICA Tip Credit — Expanded in 2025

The FICA Tip Credit (IRC §45B) helps employers recover part of the payroll taxes they pay on tipped income. Historically limited to restaurants and food service, the 2025 One Big Beautiful Bill Act (OBBBA) expanded the credit to include beauty service businesses where tipping is customary—such as medical spas, salons, barbering, esthetics, and nail care.

How It Works:

• The credit equals the employer’s share of Social Security (6.2%) and Medicare (1.45%) taxes paid on employee tips that exceed what’s needed to reach minimum wage.

• Total credit rate: 7.65% of eligible tip income.

Unlike other credits, the FICA Tip Credit doesn’t phase out based on wages or income. The key rule is that only tips above what’s needed to bring employees up to minimum wage qualify. Because minimum wage rates differ by state and even city, employers must calculate eligibility based on their local rules to make sure the credit is claimed correctly.

Examples:

• Valley Medical Spa employees reported $120,000 in tips in 2025, all above minimum wage. The spa can claim a $9,180 credit ($120,000 × 7.65%), directly reducing its tax liability.

• A bistro where employees report $200,000 in tips would qualify for a $15,300 credit ($200,000 × 7.65%).

Forms You’ll Need:

• Form 8846 — Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips

• Form 3800 — General Business Credit (where the credit ultimately flows)

Tracking Tip:  Keep three sets of records; they are essential if the IRS ever questions the calculation:

1. Reported tips by employee

2. Base wages and hours worked (to show the “excess over minimum wage”)

3. Employer FICA taxes paid on tips

Caroline Nguyen adds, “Restaurants and salons have claimed this credit for years, but for med spas and esthetics, it’s brand new. The biggest mistake I see is not tracking tips separately from wages—if you don’t, you’ll leave money on the table.”

Small Employer Retirement Plan Credits (SECURE 2.0)

Small businesses that start or expand retirement plans can tap into a series of credits under the SECURE 2.0 Act, many of which were enhanced beginning in 2023 and remain in effect for 2025–2026. These credits are separate from health- and leave-related credits, but they often work hand in hand to reduce overall employer costs.

Startup Plan Credit

• Covers 100% of qualified plan start-up costs (administration, employee education, etc.) for businesses with up to 50 employees.

• Maximum credit: $5,000 per year for the first three years.

• For employers with 51–100 employees, the 50% rate still applies, subject to the $5,000 cap.

Employer Contribution Credit

• Businesses with up to 100 employees may claim an additional credit for contributions made to employee accounts.

• For employers with 50 or fewer employees, the credit is:

  • 100% of contributions in years 1–2

  • 75% in year 3

  • 50% in year 4

  • 25% in year 5

• Credit capped at $1,000 per employee per year.

Auto-Enrollment Credit: An extra $500 per year for three years if the plan includes automatic enrollment.

Why It Matters: For a 20-employee business contributing $1,000 per employee, the employer could see up to $20,000 of credits in year 1 alone, plus $5,000 for start-up costs and $500 for auto-enrollment—nearly $25,500 in combined credits.

Forms You’ll Need

• Form 8881 — Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment

• Form 3800 — General Business Credit

Paid Family and Medical Leave Credit — Permanent Starting in 2026

The Paid Family and Medical Leave Credit (IRC Section 45S) rewards practices that provide paid family or medical leave. The OBBBA made the credit permanent and added new ways to calculate it beginning in 2026.

How the Credit Works (Wage Method):

• 12.5% credit if you pay 50% of normal wages during leave

• Credit increases by 0.25% for each percentage point above 50%

• Maximum 25% credit if you pay 100% of normal wages during leave

• Available for up to 12 weeks per employee per year

Eligibility Thresholds (effective 2026):

• Employees qualify after 6 months of tenure (reduced from 1 year)

• Part-time employees working at least 20 hours per week are included

• These thresholds are about benefit eligibility, not income or AGI levels—the employer’s income does not limit access to this credit.

New for 2026 — Premium Method:

• Employers can instead claim the credit based on premiums paid for qualifying family/medical leave insurance policies

• This means you can capture the credit even if no employees take leave, as long as you pay the premiums

• Premiums used to claim the §45S credit reduce the related deduction—track separately to avoid double-counting.

Examples:

• A daycare center with 20 staff provides 12 weeks of paid family leave at 60% of normal wages. It qualifies for a credit of about 15% of the leave wages paid.

• A law firm purchases a paid leave insurance policy in 2026 and can claim the premium-based credit even if employees don’t use the benefit that year.

• A pediatric clinic paying 100% of wages during parental leave qualifies for the full 25% credit.

Caroline Nguyen suggests: “The premium method is a game-changer. Practices and businesses that can’t afford to carry months of wages during leave can buy coverage instead and still qualify for the credit.”

Forms You’ll Need:

• Form 8994 — Employer Credit for Paid Family and Medical Leave

• Form 3800 — General Business Credit

Enhanced Child Care Credit — Major 2026 Increases

The Employer-Provided Child Care Credit (IRC Section 45F) helps practices offset the cost of providing or contracting for child care benefits. The OBBBA significantly expands the credit beginning in 2026.

Current Rules (2025):

• Credit = 25% of qualified child care expenses

• Annual cap = $150,000

• Plus 10% for qualified resource and referral services

Expanded Rules (Effective 2026):

• Credit = 40% of qualified child care expenses for most employers

• 50% credit for eligible small businesses (those meeting the gross receipts test)

• Annual cap jumps to $500,000 (or $600,000 for eligible small businesses), indexed for inflation starting in 2027

• Expanded eligibility for third-party intermediary arrangements and jointly operated facilities

Small Business Receipts Test (2026+): A business qualifies as “small” if its average annual gross receipts ≤ $31 million, adjusted for inflation each year.

What Qualifies:

• On-site child care facilities

• Contracts with licensed child care centers

• Resource and referral services (10% credit remains)

Examples:

• A regional gym chain spends $400,000 contracting with a licensed daycare center for staff.
  – 2025: Credit = $100,000 (25% × $400,000, capped at $150,000)
  – 2026: Credit = $160,000 (40% × $400,000), with room before the new $500,000 cap.

• A pediatric practice investing $300,000 to build on-site daycare in 2026 could claim up to $120,000 back (40% × $300,000).

Caroline Nguyen points out: “Child care is one of the effective recruiting perks for employers with younger staff. The 2026 expansion means larger companies can finally justify the investment, while small businesses may see half their costs covered.”

Forms You’ll Need:

• Form 8882 — Employer-Provided Child Care Credit

• Form 3800 — General Business Credit

Direct Primary Care and HSA Compatibility — A 2026 Opportunity

Direct Primary Care (DPC) arrangements—where employees pay a flat monthly fee for routine primary care—have always been allowed, but until now they came with a catch: employees in a DPC plan couldn’t also contribute to a Health Savings Account (HSA).

Starting in 2026, the OBBBA removes this barrier. Employees can participate in DPC and still remain HSA-eligible, as long as the monthly fee is within the safe harbor amounts.

New Rules (Effective 2026):

• DPC fees of up to $150/month for individuals or $300/month for families will not disqualify HSA eligibility (indexed for inflation)

• Employees can use HSA funds to pay for DPC fees and other qualifying medical expenses

• ACA Bronze and Catastrophic plans will be treated as HSA-compatible high-deductible health plans

Why It Matters: This change gives employers across industries a new way to build affordable benefit packages. For example:

• A tech startup can offer DPC memberships to staff while still letting them contribute to HSAs.

• A construction company can pair a high-deductible plan with DPC, keeping premiums lower while ensuring employees still have access to routine care.

Caroline Nguyen advises: “For employers thinking about DPC contracts, 2026 is the time to roll them out. You’ll be able to market HSA compatibility to staff—something that was a dealbreaker for many employees before this fix.”

Disabled Access Credit

The Disabled Access Credit helps small businesses offset the cost of making their facilities accessible to individuals with disabilities, as required by the Americans with Disabilities Act (ADA). While often overlooked, this credit is one of the simplest for qualifying employers to claim.

Eligibility: Available to businesses with 30 or fewer full-time employees or gross receipts of $1 million or less in the previous year.

Credit Amount: Covers 50% of eligible expenses between $250 and $10,250 with a maximum annual credit of $5,000.

What Expenses Qualify:

• Removing barriers to make facilities accessible (e.g., ramps, doorways, restrooms).

• Providing interpreters or readers for employees or customers.

• Acquiring or modifying equipment for accessibility.

• Producing accessible formats of materials (Braille, large print, audio).

Example: A small café spends $7,000 to install an accessible restroom and ramps. The first $250 isn’t eligible, but the next $6,750 qualifies. The credit covers 50% of that amount, for a $3,375 Disabled Access Credit—directly reducing the café’s tax bill.

Caroline Nguyen explains: “Many owners think of ADA improvements only as compliance costs. This credit is a way to turn those required investments into meaningful tax savings.”

Forms You’ll Need:

• Form 8826 — Disabled Access Credit

• Form 3800 — General Business Credit

How to Claim Tax Credits

Different credits require different forms, and the IRS will expect clear documentation to back up every number you claim.

Forms You’ll Need:

• Form 8941 — Small Employer Health Insurance Credit (SHOP)

• Form 8846 — Credit for Employer FICA Taxes Paid on Tips (newly expanded to med spas and beauty services)

• Form 8994 — Employer Credit for Paid Family and Medical Leave

• Form 8882 — Employer-Provided Child Care Credit

• Form 3800 — General Business Credit (where most of these credits ultimately flow and get reconciled)

Most general business credits can be carried back 1 year and forward 20 years.

Documentation Requirements:

• Employee count and wage calculations — including FTE breakdowns for the Small Employer Health Insurance Credit

• Premium payment receipts — showing payments to SHOP marketplace or carriers

• Leave policies and payroll records — to substantiate Paid Family and Medical Leave Credit claims

• Child care contracts and invoices — for on-site facilities or third-party arrangements

• Tip and wage records — showing tips, hours worked, and employer FICA taxes for the FICA Tip Credit

Caroline Nguyen reminds practice owners: “Don’t wait until filing season to gather proof. The IRS doesn’t accept vague payroll summaries—your credit can be disallowed if you can’t produce the detailed records. Set up a binder or digital folder by credit so everything is ready when your tax preparer asks.”

Common Mistakes That Cost Credits

Even well-run businesses miss out on credits because of small compliance slips. Here are the traps we see most often:

• Skipping SHOP coverage: The Small Employer Health Insurance Credit only applies if coverage is offered through a SHOP marketplace plan. A traditional small-group policy won’t qualify—even if it’s otherwise identical. Note that employers using QSEHRAs/ICHRAs aren’t eligible for the SHOP credit.
  
  

• Miscounting employees: The credit uses full-time equivalents (FTEs), not headcount. Two half-time staffers = one FTE. A restaurant with 30 part-timers might actually only have 15 FTEs, but if the math is sloppy, the IRS can disallow the credit.
  
  

• Double-dipping: You can’t use the same dollar of wages or premiums for multiple credits and a deduction. For example, if premiums are used to calculate the SHOP credit, you must reduce your deduction by that amount.
  
  

• Weak documentation: Generic insurance bills or payroll summaries aren’t enough. The IRS expects detailed records by employee, by month, and by premium or leave payment.
  
  

• Timing mistakes: OBBBA credits don’t all start at once.
  – FICA Tip Credit expansion: first applies to wages paid in 2025
  – Paid Family and Medical Leave premium method: effective for 2026 tax years
  – Child Care Credit increases: effective for 2026 and later. 

Mixing up the years can mean claiming a credit before it’s live.

Strategic Planning for Multiple Credits

Most small businesses qualify for more than one credit—but the trick is coordinating them so you don’t double-count the same wages or premiums. With good tracking, credits can layer together for major savings.

Combinations that Work Well:

• Health Insurance Credit + Paid Leave Credit — Cover core benefits while getting credit on both premiums and wages

• Child Care Credit + Health Insurance Credit — Strong for employers with younger workforces

• FICA Tip Credit + Health Insurance Credit — Especially valuable in tipping industries like restaurants, salons, and medical spas

Examples:

• A restaurant group claims the FICA Tip Credit on staff tips, the Health Insurance Credit on SHOP coverage, and the Paid Leave Credit for parental leave—saving over $40,000 in a single year.
  
  

• A marketing agency with under $31 million in receipts builds a child care benefit in 2026. With the enhanced 50% rate, the agency gets half its costs reimbursed, on top of health insurance savings.
  
  

• A medical spa coordinates its FICA Tip Credit with the Small Employer Health Insurance Credit and Paid Leave Credit, saving close to $30,000 annually

Caroline Nguyen emphasizes: “We always tell business owners to set up separate cost buckets for each credit—premiums, wages, tips, child care. That way you’re never tempted to reuse the same dollar in two places, and you can maximize the overall benefit without compliance risk.”

Working with Tax Professionals

Tax credits can be some of the most valuable savings tools for small businesses—but they’re also easy to miss if your advisor isn’t proactive. From payroll calculations to benefits design, the details matter.

The right advisor should understand:

• How your business model affects eligibility for credits (retail, restaurants, services, healthcare, etc.)

• Which employee benefits qualify, and how to document them

• How to coordinate credits with deductions to avoid double-counting

• State or local rules (like paid leave mandates or minimum wage laws) that affect federal credit calculations

Questions worth asking your advisor:

• Which credits apply to my type of business?

• How do these credits coordinate with my existing deductions?

• What documentation do I need to keep to substantiate each credit?

• How will growth plans—like adding a new location or expanding headcount—affect eligibility?

Caroline Nguyen advises: “Don’t settle for vague answers like ‘we’ll see at filing.’ Ask your CPA to model the credits during the year, not after. A mid-year projection can uncover tens of thousands in credits you’d otherwise miss.”

Next Steps for Your Business

Start by reviewing your current benefits and spotting where credits may already apply. A few action items to put on your radar now:

For 2025:

• Health insurance: If you’re not using a SHOP marketplace plan, run the numbers—switching could unlock the Small Employer Health Insurance Credit.

• Tipping industries: Restaurants, salons, and medical spas should start tracking tip income separately. The expanded FICA Tip Credit applies beginning in 2025.

• Family leave: Document any paid family or medical leave provided this year. The credit is permanent, and accurate records are essential.

For 2026 and beyond:

• Child care benefits: With the higher credit rates and caps, providing or contracting for child care becomes much more attractive.

• Direct Primary Care (DPC): Starting in 2026, DPC arrangements won’t jeopardize HSA eligibility. That makes it easier to add DPC without limiting employee benefits.

Caroline Nguyen sums it up: “Use 2025 to build your tracking systems. In 2026, when the enhanced credits kick in, you’ll be ready to capture them without scrambling.”

Tax credits reward businesses that invest in their employees. By identifying which credits apply now—and planning ahead for those expanding in 2026—you’ll keep more money in the business to reinvest in growth.

Learn more about Town’s small business tax expertise and see how our specialists help employers optimize their tax strategies while supporting their teams.

Disclaimer: This content is for educational purposes only and does not constitute personalized tax advice. Tax laws are complex and subject to change. Individual circumstances can vary significantly, and strategies that work for one business may not be suitable for another.