Tax Incentives for Hiring in a Tight Labor Market
Having trouble finding employees? The tax law provides incentives for hiring certain individuals you might not otherwise have considered.
Work opportunity credit. The credit is 40% of qualified wages up to $6,000 during an employee's first year of employment if he or she works at least 400 hours. The credit drops to 25% of qualified wages up to $6,000 if the employee works fewer than 400 hours (no credit can be claimed if the employee works fewer than 120 hours). The credit applies only for hiring individuals from the following targeted groups:
- Recipient of Aid to Families with Dependent Children
- High-risk youth between ages 18 and 25
- Vocational rehabilitation referral (someone with a physical or mental disability who has completed vocational rehabilitation services)
Note: If you must adapt your facilities to accommodate a disabled employee, you may also be eligible for the disabled access credit of up to $5,000.
- Summer youth employee, age 16 or 17, who works between May 1 and September 15
- Food stamp recipient
- SSI recipient
Welfare to work credit. The credit is 35% of qualified first-year wages up to $10,000, plus 50% of qualified second-year wages up to $10,000 (for a maximum credit per employee of $8,500 -- $3,500 in year one and $5,000 in year two). The credit can be claimed only for hiring long-term family assistance recipients.
Note: If you're concerned about hiring a person whose background raises questions about honesty, the U.S. Department of Labor has a free bonding program offering employers protection from employee theft ranging from $500 to $10,000 (800-233-2258 or www.doleta.gov/). Eligible employees include such individuals as ex-offenders and those from low-income families who lack a work history.
Caution: You must obtain necessary certification for eligible workers from your state employment security agency on or before the date the worker begins employment. Submit to the agency IRS Form 8850, Prescreening Notice and Certification Request for the Work Opportunity and Welfare-to-Work Credits (download the form from www.irs.gov).
Note: These two employment credits are set to expire December 31, 2001.
Empowerment zone credit. The credit is 20% of wages up to $15,000 (up to credit of $3,000 per year per employee). This credit applies only to employers who operate in certain designated areas and hire workers who reside within these areas. This credit will be phased out starting in 2002. For more information about this credit, see IRS Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities (download from www.irs.gov).
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BARBARA WELTMAN is an attorney and a trusted professional advocate for small businesses and entrepreneurs. She is the author with such titles as J.K. Lasser’s Small Business Taxes and Smooth Failing, and she contributes regularly to American Express OPEN and SBA.gov. Her articles have appeared in the Wall Street Journal and U.S. News and World Report. Weltman is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and hosts radio shows and podcasts, including Build Your Business radio. She has been named one of the 100 Small Business Influencers in the U.S. for the third year in a row.
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