This is part 2 of my series on the small business health insurance credit. This post will discuss the basic mechanics of calculating a “full-time equivalent employee” and average wages for purposes of the credit.

First, some ground rules:

  • Owners of a business, and any employees who are family members of owner(s) don’t count as employees for purposes of this credit. This applies to: sole proprietors, partners in a partnership, more than 2% owners of an S-corporation, and more than 5% owners of a C-corporation. This is true even in corporations, where the owner draws a salary and receives a W-2.
Also, if you are a business owner, insurance premiums paid for your insurance will NEVER qualify for this credit. Ditto for premiums paid for any employees who are your family members.

For all other employees, you calculate the number of full-time equivalent employees by:

  • Counting up the hours worked by each employee (up to 2,080 hours per employee), and then
  • Dividing the total hours worked by 2,080.


ABC, Inc. employs 10 full-time employees who work 2,080 hours during the year (so a total of 20,800 hours) and 5 employees who work a total of 4,000 hours during the year. To calculate the number of full-time equivalent employees it has, ABC adds 20,800 and 4,000, which equals 24,800, and then divides 24,800 by 2,080, which equals 11.92. That number is then rounded down to the nearest whole number, which would be 11. ABC, Inc. is considered to have 11 full-time equivalent employees for purposes of the health insurance tax credit.

To calculate average wages, you take the wages paid to the employees counted in the employee count, and then divide by the full-time equivalent number.


The 10 full-time employees in Example 1 are paid $20/hour, for total wages of $416,000. The 5 part-time employees are paid $10/hour for total wages of $40,000. In total, the amount of wages paid to the 15 employees is $456,000. The average wage for purposes of this credit is $456,000 / 11 = $41,455, which is rounded down to the nearest $1,000 (so rounded down to $41,000).

In Part 3, the fun and games continue, as I’ll discuss the requirement that the employer must pay at least 50% of the premiums.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”