Target Your Hiring for Targeted Tax Credits

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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More than one-third of small business owners have indicated that they intend to add to their payroll in the coming months. If you are hiring now, factor in the tax breaks you can garner if your new employees fall into certain categories. This can reduce your costs without reducing the quality of your workforce.

Workers in Special Categories

There is a federal tax credit called the Work Opportunity Credit for hiring someone that falls within one of 10 targeted groups. In most cases, the credit is 40% of a qualified employee’s first-year wages up to the first $6,000 for those who work a minimum of 400 hours, producing a top credit of $2,400. There is no limit to the number of employees for whom you can claim the credit.

For 2011, the 10 targeted groups are:

1. A Hurricane Katrina employee;
2. A long-term family assistance recipient;
3. A qualified recipient of Temporary Assistance for Needy Families (TANF);
4. A qualified veteran;
5. A qualified ex-felon;
6. A designated community resident;
7. A vocational rehabilitation referral;
8. A summer youth employee;
9. A Supplemental Nutrition Assistance Program (SNAP) recipient;
10. A Supplemental Security Income (SSI) recipient.

In 2010, there were two additional groups for unemployed veterans and disconnected youth, but these groups were not extended for 2011. After 2011, the Work Opportunity Credit is set to expire, but could be extended by Congress.

Details about the credit and these categories can be found in the instructions to Form 5884.

Important: There may be a similar tax credit available against state income taxes; check with your state.

Workers in Certain Locations

In addition to workers in the categories noted above, there are federal tax credits for hiring workers within certain designated areas, too.

Empowerment Zone Credit

Empowerment zones are urban and rural areas that are economically distressed and have obtained special designation from the federal government. The tax credit is 20% of first-year wages up to the first $15,000, for a top credit of $3,000 per eligible employee. This tax credit is also set to expire at the end of this year unless Congress extends it.

You can find a listing of federal empowerment zones in the instructions to Form 8844 or by using an online locator. Also check to see whether there are any tax credits for new hiring within special areas in your state. For example, within California’s Enterprise Zones, companies can earn $37,440 or more in state tax credits for each qualified employee hired. In New York, companies within an Empire Zone paying employees at least 135% of minimum wage may be entitled to a $3,000 credit for targeted employees or $1,500 credit for non-targeted employees.

Indian Employment Credit

Companies that hire someone who is an enrolled member of an Indian tribe (or a spouse of such a person) and who lives on or near an Indian reservation may be eligible for a tax credit. The amount of the credit reflects increases in employer costs for wages and health insurance coverage.

Details about this tax credit can be found in the instructions to Form 8845.

Workers with Disabilities

There is no separate tax credit for hiring someone with a disability. However, if you are a small business (those with gross receipts in the prior year did not exceed $1 million or did not have more than 30 full-time employees) and do hire a disabled worker requiring you to make certain accommodations in your workplace, you may be eligible for the disabled access tax credit. Expenditures eligible for the credit are those needed to comply with the Americans with Disabilities Act, such as removing architectural barriers or modifying equipment and devices to accommodate an employee with a disability. The credit is 50% of eligible costs over $250, but not over $10,250, for a top credit of $5,000.

You can find details about this credit in the instructions to Form 8826.

Bottom Line

If you’re planning on doing any hiring in the near future, discuss the potential for tax incentives with your tax advisor. The results could influence whether you seek out “special” employees.