Every year, thousands of employers fail to claim their fair share of the billions of dollars in government tax credits and incentive programs set aside for them. If you’ve never claimed yours, then the question is: “Why?”
Maybe you just didn’t know about these federal and state programs designed to encourage employers to hire members of specific, usually disadvantaged, groups. Just to give you an idea of what you may be leaving on the table, a recent study estimates a new health care industry worker who qualifies for one of the federal tax credit programs nets an average of $2,744 in total credits for the employer. And this kind of credit is the best kind of tax benefit because it reduces taxes dollar-for-dollar.
It’s astounding then that only 1% of all eligible U.S. employers take advantage of these programs. This means the other 99% either don’t know about the programs at all or they:
* Believe there would not be a significant return-on-investment.
* Do not have payroll, human resources and tax departments equipped to deal with the rules, regulations, and paperwork.
* Are not willing to adopt new employment screening techniques, revised employee personnel information forms or meet requirements to complete and file the required forms within strict deadlines.
These three objections are overruled, however, by the fact that the entire process can be outsourced with little or no upfront cost. A reputable employment tax credit company can administer every aspect: service initiation, applicant screening, documentation, interaction with government agencies, and comprehensive reporting. These outsourcing companies work with CPAs and payroll service providers and usually charge on a contingency basis; i.e., they only receive a portion of the money earned through the tax credits generated by your hiring process.
Know What’s Available
The Federal tax credit programs most likely to apply when you hire eligible employees are:
* Work Opportunity Tax Credit (WOTC)
* Welfare-to-Work Tax Credit (WTW)
* Empowerment Zone Employment Credit (EZEC)
* Renewal Community Employment Credit (RCEC)
*Indian Employment Credit (IEC)
The recently revised WOTC Program allows your company to receive a tax credit of up to 40% of the first $6,000 in wages paid to an employee who is a qualified member of one or more of the following nine targeted groups:
* Certain families eligible to receive benefits under the Temporary Assistance for Needy Families Program
* High risk youths
* Vocational rehabilitation referrals
* Summer youth employees
* Member of a family receiving food stamp benefits
* Person receiving certain Supplemental Security Income (SSI) benefits
* Hurricane Katrina employee (scheduled to expire 8/28/07)
* Welfare-to-work credit/long-term family assistance recipients (This is an addition under the new act and provides for a $10,000 cap for both qualified first-year wages and qualified second-year wages.)
The new act repeals the requirement that a qualified ex-felon be a member of an economically disadvantaged family. The new provisions also raised the age limit for the food stamp recipient to include individuals aged 18 but less than 40 on the date of hire and extended the submission date for screening and certification documents from 21 to 28 days.
WOTC is designed to encourage employers to hire individuals with traditionally high unemployment rates. To qualify, the employee must be a new hire, be within the targeted group outlined above, meet the stringent certification requirements, and work a minimum of 120 hours. The credit is 25% if the employee completes less than 400 hours, but more than 120 hours and increases to 40% if the employee works at least 400 hours. The maximum credit is $2,400 (40% of the first $6,000) per eligible employee.
Reach Different Age Groups
With respect to qualified summer youth employees, the maximum credit is $1,200 (40% of the first $3,000).
The certification rules are exacting. An individual is not treated as a member of a targeted group unless:
* On or before the day on which an individual begins work for an employer, the employer has received a certification from a designated state agency that such individual is a member of a targeted group; or,
* On or before the day an individual is offered employment with an employer, a prescreening notice is completed by the employer with respect to such individual, and not later than the 28th day after the individual begins work, the employer submits the notice, signed by the employee under penalties of perjury, to the designated state agency as part of a written request for certification. The state agency will either certify or deny the request for certification; if denied the agency will provide a written explanation.
The Welfare-to-Work (WTW) credit is 40% of the first $10,000 of qualified wages in the first year of employment and 50% of the first $10,000 of qualified wages in the second year of employment. The maximum credit per eligible employee therefore is $9,000. Like the provisions of the WOTC, the WTW tax credit follows the same certification rules and Federal form 8850 must be sent to the IRS within 28 days of the start of work.
The Federal Government has designated approximately 80 distressed communities around the country as either Empowerment Zones (EZ) or Renewal Communities (RC). Employers are eligible for up to $1,500 credit for qualified employees in an EZ and up to $3,000 in an RC. This credit is for each year that the employee meets the qualifications and the credit is available until 12/31/09. Generally, to qualify, the employee must reside in the EZ or RC and perform substantially all his work for the employer within that EZ or RC. In addition to employment credits, the EZ and RC programs also provide for increased deductions for qualifying property, capital gains exclusions, and other benefits.
The Native American Indian Employment Credit program provides businesses with tax credits to hire and retain individuals who are enrolled members of an Indian tribe (or the spouse of an enrolled member) and who performs substantially all the work for the employer within the reservation and lives in or near a reservation. The maximum credit is $4000 or 20% of the employer’s costs for a qualified employee’s wages and health insurance that exceed the amount paid or incurred to the employee for such costs during 1993. Employees whose total qualified wages and health insurance exceed $40,000 per year are not qualified employees.
In addition to the federal employment tax credits, most states offer additional incentives. Alabama has eleven incentive programs, some of which may be applicable to your business. Mississippi offers at least nineteen programs and Louisiana tops the list at over 40 programs.
Take some time to research the companies that specialize in tax credit processing and make sure you’re not leaving any money on the table that could be yours.
Certified Speaking Professional Mel Kleiman is an internationally recognized consultant, author and speaker/trainer on strategies for finding and keeping the best hourly employees. He is the president of Humetrics, a leading developer of systems, training processes, and tools for recruiting, selecting and retaining the best hourly workforce. Kleiman is the author of five books, including the best-selling “Hire Tough, Manage Easy.” For more information, visit www.kleimanhr.com or call (713) 771-4401. His articles appear exclusively in Convenience Store Decisions.