How do you fill out Form 8881?
Form 8881 claims four federal credits for small employers with a retirement plan. Part I covers plan startup costs (lines A to 5) and your contributions for employees (lines 6a to 6g). Part II adds $500 for automatic enrollment. Part III adds up to $500 per military spouse employee. Each total carries to Form 3800. You qualify if you had 100 or fewer employees earning at least $5,000 last year. For Part I you also need no plan for the same people in the past three years.
Three checks decide whether you can claim Part I.
- Size. No more than 100 employees who received at least $5,000 of pay in the prior year.
- No recent plan. In the three years before, you had no qualified employer plan (such as a 401(k), SEP or SIMPLE) that received contributions for substantially the same employees. Joining a state auto-IRA generally does not count against you.
- At least one regular employee. The plan must cover at least one employee who is not highly compensated. A plan for owners only earns nothing.
Parts II and III only need the size test. Each credit runs on its own clock: the startup credit for the first credit year and the next two (you can elect the year before the plan takes effect as the first year, which helps if you paid setup costs early), the contribution credit for the year the plan takes effect and the next four, and the auto-enrollment credit for the first year automatic enrollment is in the plan and the next two.
A 20-person company in its first plan year.
An illustration for a fictional company, not a promise. It has 20 employees, 2 of them owners. It pays $3,000 to set up and run a 401(k) with automatic enrollment, puts in $800 for 12 employees and $1,500 for 6 more, and the owners are paid over the wage cap. One of the 12 is a military spouse, so that $800 counts on line 6b and again, capped at $300, on line 13.
Startup costs credit (lines A to 5).
Pays back what you spend to set up and run the plan, for three years. 26 USC 45E(a) and (b).
| Line | What the form says | How to fill it in | Example |
|---|---|---|---|
| A | Number of qualifying employees. | Count employees who received at least $5,000 of compensation in the tax year before your first credit year. This number decides your rate on line 2. Over 100 means no credit. | 20 |
| 1 | Qualified startup costs incurred during the tax year. | Ordinary and necessary costs to set up or run the plan, or to educate employees about it. Provider setup fees, administration fees and recordkeeping count. Your own contributions to employees do not; they go on line 6. | $3,000 |
| 2 | 1 to 50 employees: enter line 1. 51 to 100 employees: enter 50% of line 1. | Use the count from line A. At 50 or fewer, the credit covers all of your cost. At 51 to 100, it covers half. | $3,000 |
| 3 | Employees eligible to participate, times $250. | Count only non-highly compensated employees who can join the plan this year. An owner of more than 5% this year or last is highly compensated regardless of pay, and so is anyone paid over $160,000 in the prior year (2026 figure; the employer can elect to limit this to the top-paid 20%). | 18 x $250 = $4,500 |
| 4 | The greater of $500 or line 3, but no more than $5,000. | This is your yearly limit. A very small employer still gets up to $500; nobody gets more than $5,000. | $4,500 |
| 5 | The smaller of line 2 or line 4. | Your startup costs credit for the year. You can claim it for the first credit year and the next two, three years in all. | $3,000 |
Employer contributions credit (lines 6a to 6g).
Pays back up to $1,000 per employee of what you contribute, for five years. 26 USC 45E(f).
| Line | What the form says | How to fill it in | Example |
|---|---|---|---|
| 6a | Number of employees in the preceding tax year. | Decides whether the over-50 reduction on line 6e applies. | 20 |
| 6b | Employer contributions, excluding elective deferrals, pay above the wage cap, and anyone who got more than $1,000. | Add your matching and nonelective contributions for employees who each received $1,000 or less. Leave out what employees deferred from their own pay, and leave out anyone paid above the wage cap (see the note below). | 12 employees x $800 = $9,600 |
| 6c | Employees who got more than $1,000 of matching or nonelective contributions. | Count each one at a capped amount so the credit per person stays at $1,000: $1,000 in years 1 and 2, $1,334 in year 3, $2,000 in year 4, $4,000 in year 5. | 6 employees x $1,000 = $6,000 |
| 6d | Add lines 6b and 6c. | If line 6a is 50 or less, carry this straight to line 6f. | $15,600 |
| 6e | 51 to 100 employees only: the phase-down. | Subtract 50 from line 6a, multiply by 2%, multiply that by line 6d, and subtract the result from line 6d. Example: 60 employees means a 20% cut. | Skipped (20 employees) |
| 6f | Line 6d, or line 6e(4) if you completed line 6e. | Your contribution base before the yearly percentage. | $15,600 |
| 6g | Apply the percentage for the plan year. | 100% in years 1 and 2, 75% in year 3, 50% in year 4, 25% in year 5. Nothing after that. | Year 1: $15,600 |
The wage cap. Lines 6b and 6c leave out employees whose wages (as defined for Social Security tax) were above a yearly limit. The December 2025 form prints $105,000. For tax year 2026 the IRS set it at $110,000 (Notice 2025-67). Use the figure for the year on your return.
Part I total (lines 7 and 8).
| Line | What the form says | How to fill it in | Example |
|---|---|---|---|
| 7 | Part I credits passed to you from partnerships and S corporations. | Only if you own part of a pass-through that earned the credit. | $0 |
| 8 | Add lines 5, 6g and 7. | Partnerships and S corporations report this on Schedule K. Everyone else carries it to Form 3800, Part III, line 1j. | $18,600 |
Auto-enrollment credit (lines 9 to 11).
$500 a year for three years when the plan signs employees up automatically. 26 USC 45T.
| Line | What the form says | How to fill it in | Example |
|---|---|---|---|
| 9 | Enter $500 if your plan has automatic enrollment. | The plan must include an eligible automatic contribution arrangement. You get $500 a year for the first year it is in the plan and the next two. | $500 |
| 10 | Auto-enrollment credit from partnerships and S corporations. | Only if a pass-through passed this credit to you. | $0 |
| 11 | Add lines 9 and 10. | Carries to Form 3800, Part III, line 1dd (pass-throughs use Schedule K). | $500 |
Military spouse credit (lines 12 to 15).
Up to $500 per military spouse employee a year, for three years. Only for employers with 100 or fewer employees. 26 USC 45AA.
| Line | What the form says | How to fill it in | Example |
|---|---|---|---|
| 12 | Military spouse employees participating in an eligible plan, times $200. | Count non-highly compensated employees married to an active duty service member who joined the plan within the last three tax years. The plan must let them in within 2 months of hire, give them the employer contributions others get after 2 years, and vest those at once. You may rely on the employee’s written statement of the spouse’s name, rank and branch. | 1 x $200 = $200 |
| 13 | Employer contributions for those employees, up to $300 each. | Your contributions only, not the employee’s own deferrals. | $800 paid, enter $300 |
| 14 | Military spouse credit from partnerships and S corporations. | Only if a pass-through passed this credit to you. | $0 |
| 15 | Add lines 12, 13 and 14. | Carries to Form 3800, Part III, line 1ee (pass-throughs use Schedule K). | $500 |
$19,600 in credits in year one.
| Credit | Line | Year 1 | Goes to |
|---|---|---|---|
| Startup costs | 5 | $3,000 | Form 3800, Part III, line 1j (with line 6g) |
| Employer contributions | 6g | $15,600 | Form 3800, Part III, line 1j (with line 5) |
| Auto-enrollment | 9 | $500 | Form 3800, Part III, line 1dd |
| Military spouse | 12 and 13 | $500 | Form 3800, Part III, line 1ee |
| Total | $19,600 |
The trade: the company also gives up deductions for the $3,000 of startup costs and the $15,600 of contributions the credit covers. A credit cuts tax dollar for dollar, so as long as you have tax to offset, it is worth more than the lost deduction.
Where Form 8881 claims go wrong.
- Using the wrong count on line 3. Line 3 counts eligible employees who are not highly compensated. Owners of more than 5% never count, whatever they are paid.
- Deducting the same dollars twice. Whatever you claim on line 5 comes off your deduction for startup costs, and whatever you claim on line 6g comes off your deduction for contributions. The auto-enrollment credit has no such rule.
- Counting employee deferrals as employer contributions. Line 6 only takes money you put in: matches and nonelective contributions. What employees save from their own pay does not count.
- Skipping the phase-down. With 51 to 100 employees, line 2 halves your startup credit and line 6e cuts the contribution credit by 2% per employee over 50.
- Assuming a state auto-IRA blocks the credit. Signing up for your state’s program is generally not one of the prior plans that disqualify you (the list is in section 4972(d)). A 401(k), SEP or SIMPLE in the last three years for the same employees is.
- Forgetting the credit is nonrefundable. It reduces tax you owe. Credit you cannot use this year carries forward under the general business credit rules on Form 3800.
Form 8881 questions.
Who files Form 8881?
Which version of Form 8881 is current?
How much is the Form 8881 credit worth?
What wage limit applies on line 6b?
Can I claim the credit for a plan I started last year?
Does a SEP or SIMPLE IRA qualify?
Want your numbers checked by a person?
Send us your headcount and plan costs. We work them against Form 8881 by hand and tell you what the credit is worth, free.
HOW WE CHECK
Every rule here comes from the IRS form and instructions linked above or from the tax code itself (26 USC 45E, 45T, 45AA). The example is an illustration for a fictional company. Line references match the December 2025 revision; if the IRS issues a new one, we update this page.
This page is general information, not tax advice. Reimbursa is not a tax return preparer, a plan fiduciary or a retirement plan provider. Have your CPA or enrolled agent prepare your return. Found an error? Email hello@reimbursa.com and we will fix it.