Even though times are tough, businesses still need employees, and those employees come at an expense. The Federal and California governments have established valuable tax credits for businesses that are creating jobs for the unemployed and paying insurance premiums for their employees. Small and large business owners alike are eligible if they meet the specific qualifications. Do you know if you are eligible?
California business owners should be aware of three tax credits related to hiring and payment of employee benefits that are available when filing their taxes for the 2010 or 2011 tax years. These three credits are: 1) the Federal HIRE Act Credit, 2) the California New Jobs Credit, and 3) the Federal Credit for Small Employer Health Insurance Premiums.
The HIRE Acti created two new tax benefits designed to encourage employers to hire and retain new workers. As a result, any size business that hired a previously unemployed worker after February 3, 2010 and before January 1, 2011 may qualify for both of these credits.
- The first tax benefit that the HIRE Act provided was a relief from 6.2% OASDIii for wages paid after March 18, 2010, and before January 1, 2011, to qualified employees. If an employer failed to claim the 6.2% benefit for qualified employees in 2010, they may amend their 2010 Forms 941 for the quarters affected by the relief.
- If the employer retained the new employee for at least 52 consecutive weeks (and their wages were not significantly decreased in the second 26 weeks), the HIRE Act provides an additional benefit under which the employer may qualify for a general business credit of up to $1,000 per employee (the lesser of $1,000 or 6.2% of wages).
A previously unemployed worker is one who was unemployed for 60 days prior to hire, or, who worked no more than 40 hours for any employer during the 60 day period prior to hire. The employee must certify his/her unemployment by signed affidavit. (The IRS Form W-11 or similar statement fulfills this requirement).
Taxpayers who file their returns based on the calendar year will be eligible to claim the credit on their 2011 tax returns due April 15, 2012. For those who file based on their fiscal year, the earliest opportunity to file a return claiming the credit would be for fiscal years ending after February 3, 2011. The employer is not required to reduce salary expenses by the amount of the credit and can claim this credit in conjunction with the Work Opportunity Tax Credit (WOTC)iii.
The HIRE Act credit is a limited time offer from the Federal government. Most taxpayers will have to take this credit, if qualified, on their 2011 tax return or not take it at all. As of the date of this article, there is no law extending the time period for hiring and this is the only credit of these three that applies to businesses of any size.
California New Jobs Credit
While the HIRE Act credit is available to businesses nationwide, the New Jobs Credit is effective for California business owners for taxable years beginning on or after January 1, 2009. A credit of up to $3,000 is available for qualified employers for each increase in the number of full-time equivalent (FTE) employees hired in the current year. An FTE is defined as one full-time worker, or multiple part-time workers, who is/are paid hourly wages for 2,000 hours of employment.
Unlike the HIRE Act credit, the New Jobs Credit is specifically geared toward small business owners. In order to qualify for this credit, the taxpayer can only have employed a total of 20 or fewer employees as of the last day of the preceding taxable year.
In addition, the taxpayer must have a net increase in qualified full-time employees in the current taxable year compared to the prior taxable year. If an employer commenced business in California in the current taxable year, he/she still qualifies for the credit and the number of qualified employees for the preceding taxable year would be zero.
Taxpayers may only claim the credit on a timely filed original return received by the Franchise Tax Board (FTB) on or before a cut-off date to be specified by the FTB when funds run out. Instead of a time limit being placed on this credit, California decided to set aside $400 million that is available to be claimed by all taxpayers on a first-come, first-served basis. As of September 10, 2011, only $64.6 million of the credit had been claimed.
Credit for Small Employer Health Insurance Premiums
The Health Insurance credit is offered to small employers that provide health insurance coverage to their employees and is effective for tax years beginning after December 31, 2009 and ending before January 1, 2014iv. The maximum credit is 35% of a taxable eligible small employer’s premium payments (or a maximum credit of up to 25% for tax-exempt small employer’s premium payments) taken into account for purposes of this creditv. To qualify, employers must meet the following three requirements:
- The employer must have fewer than 25 full-time equivalents. This is similar to California FTEs, but for this credit, an FTE employee must work 2,080 hours instead of 2,000.
- The average annual wages paid to the taxpayer’s employees must be less than $50,000 per FTE.
- The employer must maintain a “qualifying arrangementvi,” which is an arrangement where the employer pays at least half of the employee’s premiums uniformly for all employees under the plan.
When reporting the Credit for Health Insurance Premiums, the employer is required to reduce health insurance expenses listed on the tax return by the amount of the credit.
Why These Credits Matter Now
The HIRE Act Credit, California New Jobs Credit and the Credit for Small Employer Health Insurance Premiums are only available either for the 2011 tax year or for a limited time ending in the near future. In an economy that has been tough on business owners, saving money on business taxes is no small matter. Business owners who have the need and ability to hire new employees, or who have been paying health insurance premiums for their employees should consult with their tax preparer to determine if there is a potential direct reduction of taxes due April 2012.
Scott Hendrickson joined Vicenti, Lloyd & Stutzman more than two years ago as an Associate. He works one-on-one with business owners, their management team and employees in the areas of corporate and individual income tax, compliance and consulting. Scott thoroughly enjoys helping clients solve critical problems to improve their business operation and give them peace of mind. Scott is a proud graduate of Cal State University San Bernardino. You can reach Scott at SHendrickson@vicenticpas.com.
i The new hire retention credit was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act on March 18, 2010, and is potentially available to any business with payroll.
iiOASDI refers to Social Security’s Old-Age, Survivors, and Disability Insurance, more commonly known just as “Social Security” or FICA (Federal Insurance Contributions Act)
iiiThe WOTC is available to business owners who hire new employees, but with very specific requirements. The new employee must be pre-screened to determine if they qualify under one of nine target groups. The application to pre-screen (IRS Form 8850) can be found at http://www.irs.gov/pub/irs-pdf/f8850.pdf
ivThe Health Insurance credit was added to the Internal Revenue Code as section 45R under section 1421 of the Patient Protection and Affordable Care Act enacted March 23, 2010.
vContact your tax advisor if you are a tax-exempt employer to learn how to claim a refundable credit.
viConsult with your tax advisor as to whether your business has a qualifying arrangement.