By Marcus Renwick and Dr. Bart Basi
Most contractors, builders and remodelers need extra help from time to time. The business considerations involving extra help center on how productive the employees will be and at what rate the employer must pay them. Most of the time, it is easy enough to find decent help--at least for some jobs-- and to get the temporary worker for a reasonable wage.
But did you know that you can receive some tax credits for certain employees? This article will explore two important tax credits involving labor.
The Work Opportunity Tax Credit
The purpose of the Work Opportunity Tax Credit, which was signed into law on October 4, 2004, is to encourage employers to hire people who fall into certain disadvantaged groups.
There are eight targeted groups of people you can hire to qualify for this credit:
- Members of families receiving or recently receiving Temporary Assistance to Needy Families or Aid to Families with Dependent Children;
- 18- to 24-year-old members of a family receiving or recently receiving food stamps;
- 18- to 24-year-old residents of federally designated Empowerment Zones (EZs), Enterprise Communities (ECs), or Renewal Communities (RCs);
- 16- or 17-year-old residents of EZs, ECs, or RCs as summer youth employees;
- Veterans who are members of families receiving or recently receiving food stamps;
- Disabled persons who completed a rehabilitative service;
- Ex-felons of low income families; and
- Recipients of Supplemental Security Income benefits.
The credit applies to eligible employees who begin work before January 1, 2006 and are employed for at least 120 hours. The amount of the credit in most cases is 40 percent of the first $6000 of wages paid (making this perfect for extra temporary help) and the first $3000 of wages for Summer Youth Employees.
To use the credit, employers must complete IRS form 8850, ETA form 9061 or 9062, and must mail the forms to the employer’s State Workforce Agency. The IRS form must be mailed within 21 days of the employee’s start date.
The Welfare to Work Credit
The Welfare to Work Credit is not the same as the Work Opportunity Tax Credit. In fact, if an employer uses The Welfare to Work Credit, the employer cannot use the Work Opportunity Tax Credit on the same employee, and vice versa.
This tax credit generally targets people who have been on Aid to Families with Dependant Children or Temporary Assistance to Needy Families. Again the purpose of the credit is to entice employers to hire people within this disadvantaged group.
The maximum amount of wages that qualify for the credit is $10,000 for each employee in the first and second year of employment with the particular employer. If the employer is using the Welfare to Work Credit, the regular labor deduction for wages must be reduced by the amount of the credit received. To use the credit, the employer must fill out IRS form 8850 by the day the job is offered and mail it to their State
Employment Security Agency by the 21st day after employment begins.
The government has given employers these labor tax credits to encourage them to hire useful people in disadvantaged groups. Employing these people can be a rewarding and profitable experience for all involved. The additional tax credits are generally easy to use and well worth it.
Attorney Marcus Renwick has worked at The Center for Financial, Legal and Tax Planning Inc doing research, writing, IRS dispute resolution and client advisement.
Dr. Bart Basi, attorney, CPA and founder of the Center, specializes in financial and legal matters, particularly for closely held and/or family businesses. Both can be reached at the Center for Financial, Legal and Tax Planning Inc., 108 E. DeYoung St., Marion, IL 62959, 618/997-3436.
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