Valuable tax credits from the IRS could be an untapped boost to your bottom line.
With today’s tight labor market, the Service reminded short-staffed organizations in a recent press release, about the Work Opportunity Tax Credit (WOTC).
To take advantage of the WOTC, employers need to hire workers that qualify as belonging to a group of people that face significant barriers to employment, such as:
- long-term unemployment recipients
- unemployed veterans, including disabled veterans
- vocational rehabilitation referrals
- Temporary Assistance for Needy Families program recipients
- formerly incarcerated individuals
- Supplemental Nutrition Assistance Program program recipients
- Supplemental Security Income program recipients
- long-term family assistance recipients
- designated community residents living in Empowerment Zones or Rural Renewal Counties, and
- summer youth employees living in Empowerment Zones.
Note that this tax credit is a one-time credit for each new hire, and an employer can’t claim it for employees that are rehired.
To qualify, you need to request certification by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, within 28 days after the eligible employee begins work. It must be sent to your state workforce agency, but not to IRS.
The WOTC then gets claimed on your firm’s federal income tax return. It’s generally based on wages paid to eligible workers during the first year of employment. The tax credit is first figured on Form 5884, Work Opportunity Credit, and then claimed on Form 3800, General Business Credit.
If you plan to pursue this tax credit, or the others mentioned below, it’s crucial to huddle up with Payroll to come up with a step-by-step plan of action.
Other tax credits to investigate
Here are some other tax credits you want to make sure you’re claiming if your business is eligible for them:
Employer Credit for Paid Family and Medical Leave (Form 8994). This tax credit has been extended through 2025. To claim the credit, employers must have a written family and medical leave program that pays no less than 50% of what a qualified employee makes and covers at least two weeks of leave per year. Eligible employers may claim a general business credit of 12.5% of wages paid for up to 12 weeks of family/medical leave a year, with the credit increasing to as much as 25% if the pay rate exceeds 50%.
If you plan to pursue this tax credit, you’ll need to keep separate records that include the name and Social Security number of each qualifying employee, wages paid to each qualifying employee and the applicable percentage.
Credit for Increasing Research Activities (Form 6765). Is your company an innovation leader? Federal research and development tax credits can reduce a firm’s tax liability. Qualifying expenses generally include the design, development or improvement of products, processes, techniques, formulas or software.
When filing, you need to identify qualifying expenses and provide documentation that shows how these costs meet the requirements under Internal Revenue Code Section 41. This includes financial and business records, technical documents and possibly oral testimony.