Special Report: Small-Business Hiring and Tax Credits
If you hire workers from specific targeted groups, your business can claim a tax credit for a portion of their wages. The amount of credit varies with the group the new employee is part of. By claiming the credit, your firm reduces its out-of-pocket costs. And you'll be helping workers who've faced challenges get back on a payroll.
Among small-business federal government tax credits, the Work Opportunity Tax Credit aims to help veterans and other groups who've faced barriers to employment get back into the workforce. The credits offset some of your company's tax or Social Security liability.
Limits are placed on the amount of small-business hiring credits you receive per employee, but not on the number of employees you hire who are eligible for credits. Every staff member qualified entitles your business to a separate tax credit.
Let's look at several types of small-business hiring credits.
WOTC for veterans. By hiring veterans who've been injured or disabled in the line of duty, your business can receive up to $9,600 in credits. For noninjured service members, your firm can see credits of $2,400.
Other employee categories. The government also may give you tax breaks if you employ any of the following. These nonmilitary hires garner tax credits of up to 40% of the eligible first-year wages, up to a maximum of $6,000 based on hours worked.
- People who've been unemployed for at least 27 consecutive weeks, even if they've been receiving unemployment compensation.
- Ex-felons who've been convicted of a felony or released from prison after a felony conviction within one year of the hiring date.
- Recipients of Supplemental Security Income.
- Designated community residents — new hires ages 18 to 40 years who live in empowerment zones or enterprise or renewal communities and intend to stay in those areas. The Department of Housing and Urban Affairs website provides maps detailing covered locations in every state.
- Workers with mental or physical disabilities. These workers need to be referred to employers while receiving or having completed a vocational rehabilitative program.
- Qualified IV-A recipients who've been collecting assistance payments for any nine-month period in the past 18 months under a state Temporary Assistance for Needy Families plan.
- SNAP recipients — Credits also can accrue if you hire someone between the ages of 18 and 40 whose family received benefits through the Supplemental Nutrition Assistance Program over the past six months, or for at least three of the past five months before the hiring date.
Summer youth employees, ages 16 to 17. This tax break is aimed at businesses that need summer employees. The employees should reside in an EZ or enterprise or renewal community. The government grants credits of 40% of first-year wages, up to certain limits.
Long-term family assistance recipients. The new hire must be a member of a family that has received assistance under an IV-A program for at least 18 months prior to the hiring date; started IV-A benefits after 1997 and received them for at least 18 months, but hasn't collected the benefit for more than two years since the last 18-month period of collection; or ceased to be eligible under a federal or state IV-A assistance program within two years of the hiring date because the time limit for benefits to be paid was reached. The credit can run from 40% to 50% of wages in the first two years.
Other Small-Business Credits
- Research tax credits for technologically oriented businesses involved in research and experimentation. Some funds for R&E are deductible or eligible for tax credits, and this includes the cost of hiring and retaining employees and contractors. The rules here are especially complex, so be sure to get professional advice if you think your business is eligible.
- Disabled access credits. These are available when you make your company more accessible to new hires with disabilities. The IRS has instructions pinpointing what types of expenses qualify, and the list is extensive. But if you qualify, you can receive a tax credit of 50% of the expenses, up to certain limits. By removing barriers and updating facilities, you increase access to your company.
- EZ and renewal community employment credit. This is for hiring someone living and working in a low-income area. Your firm can receive a credit of up to $3,000 for each full- or part-time employee hired who lives in an EZ or RC. The credit equals up to 20% of the first $15,000 in wages.
- Health care. If your business and your plan meet the eligibility standards, you may be able to take advantage of a credit of up to 50% of the health insurance premiums you paid for employees.
- Fuel-efficient vehicles. Do you make deliveries? Maybe you can get money back thanks to the Alternative Motor Vehicle Credit. It's for new vehicles that meet certain fuel efficiency and mileage guidelines.
- State income tax credits. For instance, New York has an employee training incentive program credit, as well as a qualified emerging technology employment credit. If you're based in California, consider its work opportunity credit and EZ credits.
As with many tax breaks, these come with a lot of limits, conditions and exceptions, so be sure to speak with a professional to see which of these are applicable to you and under what circumstances.