Your staff is your most valuable company asset, so finding and keeping valued employees on the payroll is essential.
Some good news: Tax breaks can help you do this — and recent changes to federal law make them even better than before. Make sure you keep up with the changes, as during the economic recovery, your business will want to use all available means to achieve its goals.
Here are some tax incentives to check out now for improving your staff.
1. Work Opportunity Tax Credit
The work opportunity tax credit is a federal tax credit that reduces income taxes for eligible employers. The credit is for hiring individuals from certain targeted groups fixed by the law. These groups include ex-felons, certain former military personnel, and long-term family assistance recipients. Another group is the “long-term unemployed,” which are individuals who’ve been out of work for 26 consecutive weeks. As employers start to ramp up staffing when recovering from the pandemic, this particular group of individuals may have considerable talent to offer a company. Find a complete list of targeted groups from the IRS.
The amount of the credit varies with the targeted group. The basic credit for most groups is 40 percent of first year wages up to $6,000, for a maximum credit of $2,400. But there is no limit to the number of employees for whom you can claim the credit. The credit, which had been scheduled to expire at the end of 2020, has been extended for five years (through 2025).
Important: To claim the credit, you must submit IRS Form 8850 to your state workforce agency within 28 days of the start of employment to verify that the worker belongs to a targeted group.
[Related: Small Business Taxes 101 — What to Expect in 2021]
2. Employee Retention Credit for COVID-19
Due to the pandemic, Congress created a tax credit to incentivize employers to keep employees on the payroll. This credit—the employee retention credit—is a refundable employment tax credit of 50 percent of qualified wages up to $10,000 per employee in 2020 (70 percent of up to $10,000 per quarter for January 1, 2021, through June 30, 2021). There is no limit on the number of employers for whom you can claim the credit.
The credit can be claimed only by “eligible employers.” This means having a reduction in gross receipts year over year. The decline is now 20 percent (it originally had been 50 percent). What’s more, you may be able to use prior quarters gross receipts to determine eligibility.
The credit is claimed on Form 941. Find more information about this employment tax credit from the IRS.
3. Employee Retention Credit for Disaster Situations
If your business experienced a federally-declared disaster (other than COVID-19), you may be eligible for an income tax credit for keeping workers on your payroll (whether or not they perform services). To be eligible, you must have conducted an active business in a qualified disaster area and became inoperable due to the incident. A qualified disaster area is any location declared as such under the Robert T. Stafford Disaster Relief and Emergency Assistance Act beginning January 1, 2020, through February 26, 2021.
The credit is 40 percent of qualified wages up to $6,000, for a maximum credit of $2,400 per employee. There’s no limit on the number of employees for whom you can claim this employee retention credit. The deduction for compensation is reduced by the amount of the credit and like other income tax credits, this credit is subject to the general business credit limitation. If the limitation applies, it means an amount is carried back one year and forward for up to 20 years.
You cannot use the same wages for more than one credit. So, if you claim the work opportunity credit for an employee, you cannot also claim the employee retention credit for that employee. And you can’t count any wages used for the COVID-19-related employee retention credit.
For more information, see instructions to Form 5884-A (the version for 2020 and 2021 is not yet available).
[Related: 5 Ways to Firm Up Your Firm’s Work-From Home Policies]
Barbara Weltman is the founder of Big Ideas for Small Business, Inc., which publishes Idea of the Day. She is the author of J.K. Lasser’s Small Business Taxes 2020 and other books that inform the small business community of tax, financial, and legal information they should know about.