The economy is quickly recovering from the pandemic and many area small businesses are seeing an increase in demand. But, thanks to stimulus checks, higher unemployment compensation, and continuing health and safety fears, many employers are finding it difficult to entice workers back to their jobs.
Some larger employers — from restaurant chains to Wawa — have been offering hiring bonuses. But can small businesses still struggling afford the same? Thanks to a little-known federal tax program, the answer could be yes.
The program is called the Work Opportunity Tax Credit. It’s been around for a number of years, but was extended in December’s stimulus bill through the end of 2025. The credit — which reduces the amount of federal taxes owed — can be a lucrative recruiting tool for small businesses that want to pay hiring bonuses.
“Many of our clients have been impacted adversely by COVID-19 and have looked to us for ideas to cut down on costs in order to keep their doors open,” said Rebecca Norris, CPA and tax manager at Isdaner & Co. LLC in Bala Cynwyd. “The program is one of the money-saving tools we recommend to these clients.”
The tax credit is available to employers that hire certain types of employees, such as those coming off welfare or a “qualified” veteran, which includes ex-service personnel who were unemployed for anywhere from four weeks (whether or not consecutive) to at least six months over the last year. The list of eligible workers also includes ex-felons, qualified Social Security insurance recipients or those who have been receiving long-term welfare assistance.
But the credit is also available to employers who hire a “qualified long-term unemployment” recipient. That worker is defined as someone who has been unemployed for not less than 27 consecutive weeks at the time of hiring and received unemployment compensation during some or all or the unemployment period. Sound familiar? It should. Given the deep impact of the pandemic recession, many workers today find themselves in this situation.
If any of your prospective hires fit that description, your business may qualify for the tax credit. To make sure of this you have to file Form 8850 — the Pre-Screening Notice and Certification Request — with your respective state workforce agency (Pennsylvania is here, New Jersey is here) within 28 days after the eligible worker begins work to certify that the worker is eligible.
So how much money can you save? A lot.
The credit can reduce your taxes anywhere from $2,400 to $9,600 per employee, depending on which target group the qualified employee belongs to. For most hires, however, it’s calculated at 40% of their yearly wages, up to a total credit of $6,000. The person must be retained for at least 400 hours during the year to get this amount. Otherwise the credit may be reduced. The credit can be even higher if the person you hire has been receiving long-term welfare assistance.
If you own a “pass through” organization (such as an S-Corporation or partnership), the credit is taken on both your federal and state individual tax returns against the taxes you owe. But it can also be used to offset payroll taxes, so both for-profits and non-profit organizations are able to take advantage.
“While for-profit businesses have greater flexibility in utilizing the Work Opportunity credit, in some cases tax-exempt organizations can benefit from it, as well,” Norris said.
All of the calculations are done on IRS Form 5884. The credit is non-refundable, which means you need to use it that year or lose it. However, you are still able to carry it to last year’s tax returns or carry it forward for 20 years.
My advice is to not wait until the end of the year to take advantage of this credit. Use it as a proactive tool.
When you’re looking to hire a prospective employee, find out as soon as possible whether that person falls into any of the credit’s eligible categories (the “qualified long-term unemployment recipient” being the most common). Calculate the credit in advance of hiring the employee and use all or a portion of that future benefit to offer a hiring bonus. It’s extra money that the government is providing you and it could make the difference between hiring a great person or losing the job candidate to someone else.
“Due to the effects of the pandemic over the past year, there are more job applicants than ever that can qualify employers for the program,” Norris said. “We recommend that all employers pre-screen their job applicants for Work Opportunity Tax Credit eligibility to avoid leaving money on the table.”
Gene Marks is a certified public accountant and the owner of the Marks Group, a technology and financial management consulting firm in Bala Cynwyd.
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