Using Tax Credits to Reduce Taxable Income

Using new and extended tax credits, businesses can off-set the costs of COVID-related expenses and payroll to reduce taxable income and improve margins.

From interruptions to your business operations, to the unexpected expense of implementing cleaning and safety protections in the workplace, the pandemic placed additional burdens on industries already challenged by narrow profit margins. However, legislation passed at the end of 2020 and in early 2021 provides opportunities for you to reduce your taxable income through tax credits targeting payroll, hiring practices and the Paycheck Protection Program (PPP).

Some of these credits, like the Work Opportunity Tax Credit (WOTC) have been extended through 2025. Others, including the Employee Retention Credit and PPP have limited availability. Taken together, they may be just what your business needs to have a positive impact on your bottom line.

Work Opportunity Tax Credit (WOTC)

Even beyond its ability to reduce your taxable income by providing a tax credit for each eligible hire, WOTC lets you tap into segments of potential employees who are anxious to rejoin the workforce — expanding the pool of employees you’re able to access. Depending on your hiring volume, that can mean reducing your tax liability by an average of $1,000 per employee, with a credit potential up to $9,600 for some employees. Some of these segments include qualified veterans, ex-felons, long-term unemployment recipients and Supplemental Nutrition Assistance Program (SNAP) recipients, to name a few.

The tax credits you can earn vary by the employee’s wages and hours worked. For example, an employee must work a minimum of 120 hours for an employer to qualify. WOTC is applied to your federal taxable income, so you’ll need to file for the credit. There is also paperwork to be filed with the state to qualify an employee for the tax credit.

Employee Retention Credit

For employers who kept employees on staff during the pandemic, the Employee Retention Credit (ERC) provides a tax credit of up to $5,000 for each employee that received a qualified wage from March 13 through December 31, 2020, and up to $7,000 per employee per quarter from January 1 through June 30, 2021. The tax credit is taken from your quarterly payroll tax obligation against the employee portion of FICA.

The ERC is designed for businesses whose operations were partially or completely suspended as a result of government action or who saw receipts decline by 50% or greater quarter over quarter in the qualifying time period in 2020, or by 20% or greater quarter over quarter in the qualifying time period in 2021. There are also qualifications based on the average number of full-time employees, which are different for 2020 and 2021.

A change made in December 2020 allows you to qualify for the tax credit even if you also took advantage of PPP. So, if you didn’t receive the Employee Retention Credit for 2020, you can go back and apply for it in 2021.

Other Hiring Incentives

Your business may also qualify for other hiring incentives being offered on a state level. Several states offer tax credits for hiring ex-offenders, people with disabilities and veterans. The Federal Bonding Program is offered through the U.S. Department of Labor as a guarantee of employee job honesty when hiring ex-offenders or other at-risk employee groups,  providing protection against costs related to any dishonesty.

Listen and Learn from a Lively Discussion

A recent Tax Talk webinar featured a discussion of these income reduction tax credits and how they can be used effectively by both cleaning and security companies. You’ll also hear about other workplace issues that are top of mind for businesses coming out of the pandemic – including the Healthy and Safe Workplace Tax Credit and OSHA requirements, and limited liability protections related to the pandemic.

Each tax incentive comes with its own set of tax forms and requirements. However, if you use an ERP solution to manage your payroll, your software should be able to simplify the filing process by determining qualifying employees and wages, as well as the necessary paperwork. So, you’re able to maximize your tax credit and minimize your taxable income more easily.

TEAM Software is dedicated to ensuring our software solutions meet the ever-changing needs of our customers. While we’re committed to keeping you informed, it’s important to do your own research and consult your own legal and tax advisors with specific questions or concerns. To learn more about tax credits your cleaning or security company may qualify for, read our recent blog post on Work Opportunity Tax Credits.