If you’re thinking about hiring new employees this year, you won’t want to miss out on these tax breaks.
1. Work Opportunity Credit
The Work Opportunity Tax Credit (WOTC) is a federal tax credit for employers that hire employees from the following targeted groups of individuals:
- A member of a family that is a Qualified Food Stamp Recipient
- A member of a family that is a Qualified Aid to Families with Dependent Children (AFDC) Recipient
- Qualified Veterans
- Qualified Ex-Felons, Pardoned, Paroled or Work Release Individuals
- Vocational Rehabilitation Referrals
- Qualified Summer Youths
- Qualified Supplemental Security Income (SSI) Recipients
- Qualified Individuals living within an Empowerment Zone or Rural Renewal Community
- Long Term Family Assistance Recipient (TANF) (formerly known as Welfare to Work)
The tax credit (a maximum of $9,600) is taken as a general business credit on Form 3800 and is applied against tax liability on business income. It is limited to the amount of the business income tax liability or social security tax owed. Normal carry-back and carry-forward rules apply.
For qualified tax-exempt organizations, the credit is limited to the amount of employer social security tax owed on wages paid to all employees for the period the credit is claimed.
Also, an employer must obtain certification that an individual is a member of the targeted group before the employer may claim the credit.
Note: The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) retroactively allows eligible employers to claim the Work Opportunity Tax Credit (WOTC) for all targeted group employee categories that were in effect prior to the enactment of the PATH Act, if the individual began or begins work for the employer after December 31, 2014 and before January 1, 2020.
For tax-exempt employers, the PATH Act retroactively allows them to claim the WOTC for qualified veterans who begin work for the employer after December 31, 2014, and before January 1, 2020.
2. Payroll Tax Deduction – R & D Tax Credit
Starting in 2016, startup businesses (C-corps and S-corps) with little to no revenue that qualify for the research and development tax credit can apply the credit against employer-paid Social Security taxes instead of income tax owed. Sole proprietorships, as well as Partnerships, C-corps and S-corps with gross receipts of less than $5 million for the current year and with no gross receipts for the previous year, can take advantage of the credit. Up to $250,000 in payroll costs can be offset by the credit.
3. Disabled Access Credit and the Barrier Removal Tax Deduction
Employers that hire disabled workers might also be able to take advantage of two additional tax credits in addition to the WOTC.
The Disabled Access Credit is a non-refundable credit for small businesses that incur expenditures for the purpose of providing access to persons with disabilities. An eligible small business is one that earned $1 million or less or had no more than 30 full-time employees in the previous year; they may take the credit each, and every year they incur access expenditures. Eligible expenditures include amounts paid or incurred to:
1. Remove barriers that prevent a business from being accessible to or usable by individuals with disabilities;2. Provide qualified interpreters or other methods of making audio materials available to hearing-impaired individuals;
3. Provide qualified readers, taped texts, and other methods of making visual materials available to individuals with visual impairments; or
4. Acquire or modify equipment or devices for individuals with disabilities.
The Architectural Barrier Removal Tax Deduction encourages businesses of any size to remove architectural and transportation barriers to the mobility of persons with disabilities and the elderly. Businesses may claim a deduction of up to $15,000 a year for qualified expenses for items that normally must be capitalized. Businesses claim the deduction by listing it as a separate expense on their income tax return.
Businesses may use the Disabled Tax Credit and the Architectural/Transportation Tax Deduction together in the same tax year if the expenses meet the requirements of both sections. To use both, the deduction is equal to the difference between the total expenditures and the amount of the credit claimed.
4. Indian Employment Credit
The Indian Employment Credit provides businesses with an incentive to hire certain individuals (enrolled members of an Indian tribe or the spouse of an enrolled member) who live on or near an Indian reservation. The business does not have to be in an empowerment zone or enterprise community to qualify for the credit, which offsets the business’s federal tax liability.
The credit is 20 percent of the excess of the current qualified wages and qualified employee health insurance costs (not to exceed $20,000) over the sum of the corresponding amounts that were paid or incurred during the calendar year of 1993 (not a typo).
5. State Tax Credits
Many states use tax credits and deductions as incentives for hiring and job growth. Employers are eligible for these credits and deductions when they create new jobs and hire employees that meet certain requirements. Examples include the New Employment Credit (NEC) in California, the Kentucky Small Business Tax Credit, and Empire Zone Tax Credits in New York.