Many businesses today struggle to attract needed talent and address high employment costs. At the same time, the Internal Revenue Service (IRS) offers federal tax incentives to encourage businesses to hire new employees. These hiring credits are used to address high unemployment rates as well as to target specific groups of the unemployed.
Furthermore, the federal government together with a number of states allows businesses to claim tax credits for hiring members of targeted groups and for conducting business in specifically designated areas. Thus, they provide hiring credits to companies in order to encourage business expansion and new hiring in targeted communities but also help them reduce costs by taking advantage of employment-related tax credits and financial incentives. Therefore, there are a few hiring and zone-based credits that can be particularly valuable to a wide range of businesses.
The Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is a federal tax credit designed to benefit employers that hire individuals from target groups facing significant barriers to employment. Employers claim an estimated $1 billion each year from the WOTC, a hiring credit that helps members of targeted groups go back to work while stimulating productivity and economic growth.
After a five-year extension introduced in late 2015 with the Protecting American from Tax Hikes (PATH) Act, WOTC was extended for another year on December 20, 2019, when the U.S. President signed H.R. 1865, Further Consolidated Appropriations Act, 2020. Therefore, it will remain active through 2020, as one of the most valuable hiring credits for both employers and employees across the U.S.
The value of WOTC is determined by the target group the employee qualifies under, the number of hours worked, and the wages earned in the period of employment. Employers have to apply for WOTC within 28 days of a new hire’s start date. Depending on which target group the individual belongs to, the maximum credit per new hire can range from $2,400 to $9,600. Target groups for WOTC include:
- Temporary Assistance to Needy Families (TANF) Recipient,
- Qualified Veteran,
- Qualified Ex-felon,
- Designated Community Resident,
- Vocational Rehabilitation Referral,
- Summer Youth Employee,
- Qualified SNAP Recipient,
- Supplemental Security Income (SSI) Recipient,
- Long-Term TANF Recipient, and
- Qualified Long-Term Unemployment Recipient.
The Indian Employment Credit
The Indian Employment Credit is a federal tax credit designed to encourage employers to hire and retain Native Americans who live on or near an Indian reservation. The program ended in 2017 but was reauthorized through 2020.
As one of the hiring credits that create economic opportunities and quality jobs for Native Americans and their families, the Indian Employment Credit provides employers with significant tax benefits to stimulate immediate growth as well as growth in future years. Employers can claim an annual federal tax credit of up to $4,000 per qualifying employee. There is no limit to the total value that can be claimed through the hiring credit.
For an employee to qualify a business for the Indian Employment Credit, they have to meet the following requirements:
- The employee has to be an enrolled member of an Indian tribe or the spouse of an enrolled member of an Indian tribe,
- The employee performs substantially all of his or her services for the employer within an Indian reservation, and
- While performing said services, the employee’s main home has to be on or near that Indian reservation.
The Empowerment Zones Credit
Congress established federal Empowerment Zones (EZ) across the United States to assist economically distressed urban and rural communities. To stimulate economic development and create jobs within these designated areas, the federal government offers hiring credits for businesses hiring employees that live and work in these communities.
Launched in 1993, the Empowerment Zone and Enterprise Community (EZ/EC) Initiative identified empowerment zones, enterprise communities, and renewal communities across the U.S. to create self-sustaining, long-term development in distressed urban and rural areas. The program was recently extended through December 31, 2020, but employer benefits can be claimed retroactively for years 2018 and 2019.
Benefits of Empowerment Zone hiring credit are that:
- Employers can claim an annual hiring tax credit of up to $3,000 for each employee that lives and works in a designated Empowerment Zone, and
- Employers can retroactively claim the credit if they have not taken it previously to reduce their federal income tax, subject to the statute of limitations.
State Hiring Credits
State and local governments also offer many tax credit and incentive programs to encourage new job creation and the hiring of residents in their jurisdiction. Although varying from state to state, these programs include enterprise zone credits, general hiring credits, targeted hiring credits, and job expansion and retention tax credits. The amount of credit and the type of tax they offset varies by state. State hiring credits encourage employers to create new jobs, expand their existing payroll, or retrain current employees, thus ensuring that businesses within the state remain successful and competitive.
Taking Advantage of Federal and State Hiring Credits
Both federal and state hiring credits offer valuable opportunities to boost businesses’ cash flow. They are not only a way for companies to reduce their tax burden but also help organizations achieve a reduction in their cost per hire statistics while helping members of specific groups of the unemployed. However, leveraging hiring credits can be a time-consuming process that poses an administrative burden for many companies. That is why having effective and reliable hiring credits and incentives management processes in place is essential to ensure businesses take full advantage of the tax credit opportunities available.
While federal and state hiring credits have different benefits, they are not easily claimed. However, streamlining the entire process removes paper from the process, drives enhanced security, and increases compliance. Employers also save additional time and money by screening for different federal and state hiring credits simultaneously. As a result, with precise and advanced hiring credits and incentives management process employers can adhere to new legislation and government-sponsored initiatives, lower their effective tax rate, and both effectively and efficiently manage the process.