The government wants to pay you $9000 for your most recent hourly-paid new hire. It will be paid in the form of tax credits available to your business, and it's not a deduction. It's a credit which is applied dollar for dollar to your tax bill. If the credits reduce your tax bill to the point that the government actually owes you money, you'll get a check from the IRS.
But how do you know which employees qualify for which credits, and how do you know if you're claiming the right amount?
If you have any employees, there are a number of tax credits out there for you to claim. The Work Opportunity Tax Credit (WOTC), Empowerment Zone Tax Credit (EZ), and the Renewal Community Tax Credit (RC) can realize substantial tax savings for your company. To assess the eligibility of an employee, you need to fill out IRS form 8850. [www.irs.gov/pub/irs-pdf/f8850.pdf]
The WOTC credit makes up 95% of federal employment tax credit claims, so it's the one you're most likely to need to file. There is a list of nine criteria governing eligibility, and your new hire only needs to have qualified for one of them. The employee may be eligible if they are a:
But how do you know which employees qualify for which credits, and how do you know if you're claiming the right amount?
If you have any employees, there are a number of tax credits out there for you to claim. The Work Opportunity Tax Credit (WOTC), Empowerment Zone Tax Credit (EZ), and the Renewal Community Tax Credit (RC) can realize substantial tax savings for your company. To assess the eligibility of an employee, you need to fill out IRS form 8850. [www.irs.gov/pub/irs-pdf/f8850.pdf]
The WOTC credit makes up 95% of federal employment tax credit claims, so it's the one you're most likely to need to file. There is a list of nine criteria governing eligibility, and your new hire only needs to have qualified for one of them. The employee may be eligible if they are a:
- Member of a family receiving Food Stamps
- Member of a family receiving Aid to Families with Dependent Children (AFDC)
- Veteran of the US Military
- Ex-felon, pardoned, paroled or work-release individuals
- Vocational rehabilitation referral
- Summer Youth employee
- Supplemental Security Income (SSI) recipient
- Resident of an Empowerment Zone, Renewal Community, Enterprise Community or Rural Renewal Community
- Receiving Long Term Family Assistance (TANF), formerly known as Welfare to Work
The timeliness of you having a tax credit applied to your taxes depends on the state where your business is located. In January 2010, Larry Cummings, Chief Connector at Gadsden, Alabama-based TaxBreakLLC.com, said, “Rhode Island is taking over three years to apply some of these credits. Right now Iowa, Ohio, Virginia, and Colorado have the fastest processing times.”
You may have heard horror stories about how much work it can be, but there can be significant value in making sure you claim the credits your company is entitled to. According to Cummings, “up to 20 percent of new hires qualify for tax credits worth up to $9000 per eligible new hire. There is a lot of money not being claimed because 95% of small businesses think that the process is too difficult, or that their CPA is taking care of it." To do the quick math here—if you have 100 employees, 20 of whom are eligible, you can reduce your tax burden by up to $180,000.
If Cummings is right, and your CPA or tax preparer isn't taking care of it, here's the reason:
Tax credits are nothing to do with the IRS. Okay, that's only partly true, but it's the thing you need to bear in mind. Tax credits like the WOTC are not administered by the IRS. They belong to the Department of Labor, and therefore they should be in the scope of your human resources, rather than accounting, function.
Your tax preparer handles your taxes once a year, but some credits are an ongoing task, in need of attention for several months after you hire an employee.
For most small businesses, contracting with a tax credit service is the best way to make sure you don't miss out on the federal and state allowances available to your company. Most business tax preparation organizations will provide an analysis of write-offs, deductions, and tax breaks your business is entitled to. But—and this is important—they may will not be able to provide tax credit information for your workforce, because some of those credit claims need to be submitted within a specific time-frame after hiring, and others need to be monitored on some pre-defined frequency. Your tax preparer was likely not involved early enough in the process to help you with it, or doesn't have the resources to monitor your employees eligibility on an ongoing basis. Remember, assuring that your employees are eligible is a human resources function, not an accounting function.
Companies such as TaxBreak LLC [www.taxbreakllc.com], and Job Match LLC [www.iApplicants.com] will work proactively for you by matching your employees' W-2 forms against available credits. They may also assist in training your managers to assess eligibility of new employees at the hiring stage.
All tax credit services want to make money, often as a percentage of the total credits they process for your business, but those requirements change from industry to industry, and state to state. As a result of this, the industry your company is in, and the location of your business, will affect the amount of tax credits you are likely to be able to claim. The profit margin is related to the number of W-2s that are processed, and the amount of credit per W-2. So if you have a large number of employees, each eligible for a small credit, that is going to be less attractive to a tax credit services provider, simply because it's more work for less money.
If you are claiming a WOTC credit for an employee who was released from prison in the last year, you'll need discharge paperwork and maybe parole records to demonstrate that your employee is eligible. Any documents you need to use when preparing your company's taxes need to be appropriately filed and available at tax-time. Bad record keeping can result in your company not being able to provide supporting information to demonstrate eligibility for tax credits it may be claiming.
You might just squeak through without all the documentation you need, but remember—if you get audited, the IRS will usually not go back more than 3 to 6 years unless you are still using Enron and WorldCom's accounting playbook, in which case there is no limit to how far back they can investigate your company's tax returns.
You may have heard horror stories about how much work it can be, but there can be significant value in making sure you claim the credits your company is entitled to. According to Cummings, “up to 20 percent of new hires qualify for tax credits worth up to $9000 per eligible new hire. There is a lot of money not being claimed because 95% of small businesses think that the process is too difficult, or that their CPA is taking care of it." To do the quick math here—if you have 100 employees, 20 of whom are eligible, you can reduce your tax burden by up to $180,000.
If Cummings is right, and your CPA or tax preparer isn't taking care of it, here's the reason:
Tax credits are nothing to do with the IRS. Okay, that's only partly true, but it's the thing you need to bear in mind. Tax credits like the WOTC are not administered by the IRS. They belong to the Department of Labor, and therefore they should be in the scope of your human resources, rather than accounting, function.
Your tax preparer handles your taxes once a year, but some credits are an ongoing task, in need of attention for several months after you hire an employee.
For most small businesses, contracting with a tax credit service is the best way to make sure you don't miss out on the federal and state allowances available to your company. Most business tax preparation organizations will provide an analysis of write-offs, deductions, and tax breaks your business is entitled to. But—and this is important—they may will not be able to provide tax credit information for your workforce, because some of those credit claims need to be submitted within a specific time-frame after hiring, and others need to be monitored on some pre-defined frequency. Your tax preparer was likely not involved early enough in the process to help you with it, or doesn't have the resources to monitor your employees eligibility on an ongoing basis. Remember, assuring that your employees are eligible is a human resources function, not an accounting function.
Companies such as TaxBreak LLC [www.taxbreakllc.com], and Job Match LLC [www.iApplicants.com] will work proactively for you by matching your employees' W-2 forms against available credits. They may also assist in training your managers to assess eligibility of new employees at the hiring stage.
All tax credit services want to make money, often as a percentage of the total credits they process for your business, but those requirements change from industry to industry, and state to state. As a result of this, the industry your company is in, and the location of your business, will affect the amount of tax credits you are likely to be able to claim. The profit margin is related to the number of W-2s that are processed, and the amount of credit per W-2. So if you have a large number of employees, each eligible for a small credit, that is going to be less attractive to a tax credit services provider, simply because it's more work for less money.
If you are claiming a WOTC credit for an employee who was released from prison in the last year, you'll need discharge paperwork and maybe parole records to demonstrate that your employee is eligible. Any documents you need to use when preparing your company's taxes need to be appropriately filed and available at tax-time. Bad record keeping can result in your company not being able to provide supporting information to demonstrate eligibility for tax credits it may be claiming.
You might just squeak through without all the documentation you need, but remember—if you get audited, the IRS will usually not go back more than 3 to 6 years unless you are still using Enron and WorldCom's accounting playbook, in which case there is no limit to how far back they can investigate your company's tax returns.
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