Payrolls are expected to expand this year, making it more challenging for employers to find good workers. The strong job market likely will pressure employers to offer higher wages and more benefits than in the recent past in order to attract and retain talented employees. This all adds to the cost of hiring. Fortunately, there is some tax help to ameliorate the cost, here are five new employee tax breaks.
New Employee Tax Breaks
Work Opportunity Credit
If you hire workers from certain targeted groups, you can claim a tax credit for a portion of their wages. The amount of the credit varies with the group to which a new employee belongs. In effect, claiming the credit reduces your out-of-pocket costs for these workers. Targeted groups include:
- Certain veterans
- Food stamp recipients
- Temporary Assistance for Needy Families recipients
- Designated community residents
- Vocational rehabilitation referred individuals
- Supplemental Security Income recipients
- Summer youth employees
- Long-term unemployed (those unemployed for at least 27 weeks)
To claim the credit, you must submit IRS Form 8850 (PDF) to your state workforce agency within 28 days of the first day of the new worker’s employment. The agency will certify whether the worker is a member of a targeted group. There’s helpful information about this tax credit from the Department of Labor.
Note: Because the credit was reinstated for 2015 late in the year, the IRS has provided transition relief (PDF) for submitting Form 8850 to the state workforce agency. If you hired any worker between January 1, 2015, and May 31, 2016, from a targeted group other than a long-term unemployment recipient (or a long-term unemployment recipient between January 1, 2016, and May 31, 2016), you can submit the form through June 29, 2016, to claim the credit on your 2015 tax return for 2015 hires (2016 for long-term unemployment recipients).
Empowerment Zone Credit
If you do business within an area that has a special designation as an empowerment zone, you can claim a tax credit of 20 percent of the wages paid to the new employee up to $15,000 (top credit of $3,000). There are urban and rural empowerment zones, which are distressed economic areas designated by the government. A qualified employee for purposes of the credit is someone who works full-time or part-time for a business located within an empowerment zone and who also lives within the empowerment zone.
You can see a list of designated areas for this credit from the IRS (PDF).
Small Business Deals
Indian Employment Credit
For purposes of this employment-related credit, the tax law uses the term “Indian” and does not use the term “Native American.” If you do business on an Indian reservation and you hire a worker who is a member of a tribe and lives on or near the reservation, you can take a tax credit. 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 (yes, this date is correct).
Payroll Tax Reduction for R&D Expenses
Small businesses engaged in research activities usually qualify for a research credit. However, until now a credit was beneficial only if companies were profitable. Start-ups and young businesses engaged in research activities may have little or no revenue and can’t benefit from the usual research credit. Starting in 2016, they can apply the credit against the employer’s Social Security taxes up to $250,000, rather than against income taxes. In other words, your payroll costs can be reduced by this credit offset.
Small businesses for purposes of the payroll offset are corporations (C and S) or partnerships with gross receipts of less than $5 million for the current year and no gross receipts for any of the preceding tax years. Sole proprietors can also qualify for the credit.
Caution: Excessive or bogus research credits is on the IRS’s 2016 Dirty Dozen Tax Scams, so expect the IRS to look carefully at claims for the research credit.
State Income Tax Credits
Don’t overlook tax breaks available on the state level. For example, California also has a work opportunity credit and an empowerment zone credit. New York offers an Empire Zone credit, an employee training incentive program credit, an employment of persons with disabilities credit, and qualified emerging technology employment credit.
As the cliché goes, “take credit where credit is due” by exploring your employment-related options. While you likely won’t hire a worker solely because it entitles you to a tax credit, if you have a choice between workers, the credit may be the tipping point in your decision.
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