Using Tax Credits to Reduce Taxable Income

Taking advantage of tax credits to reduce taxable income is more than just a common business practice. Today, it’s an absolute necessity, especially for cleaning and security contractors operating with narrow profit margins while relying on a revolving door of workers who often move on to other jobs or occupations.

Tax credits can help businesses save huge dollar amounts on hefty tax payments. That’s because unlike tax deductions, which lower tax liability on how much is owed, a tax credit is generally more favorable. Comparatively, a tax credit is a dollar-for-dollar deduction on a tax bill, while a tax reduction saves money on a potentially lump sum.

Tax season in the United States begins in a few weeks. Business owners who acclimate themselves with potential tax credits could reduce the amount of taxes their company owes. Paying less in taxes could mean reinvesting valuable resources back into the business. 

Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit (WOTC) was created by the federal government to encourage business owners to invest in people who have faced consistent barriers. This tax credit has the power to reduce taxable income by providing a tax credit for each eligible hire. Additionally, WOTC lets business owners tap into segments of potential employees anxious to rejoin the workforce. In short, this incentive expands the pool of employees a company can access. 

Depending on the hiring volume of a company, that can mean reducing tax liability by an average of approximately $1,200 per employee, with a credit potential of 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.

Tax credits are earned depending on 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 federal taxable income. Like any federal tax credit, businesses will need to file with the IRS and complete the necessary paperwork to qualify.

Empowerment Zone Employment Credit

To stimulate development in economically distressed urban and rural communities, the U.S. Department of Housing and Urban Development designated certain areas of the country as empowerment zones, which are eligible for tax incentives. 

Although empowerment zones expired at the end of 2017, business owners who hire workers living in one of these areas can still apply for the Empowerment Zone Employment Credit. According to the Consolidated Appropriations Act of 2021, an extension of these designations is applicable until the end of 2025.

Businesses located in empowerment zones are eligible for employment credits. Companies may earn up to $1,500 annually for every employed renewable community resident, and those that qualify can receive up to $3,000 for each full- or part-time employee who lives in an empowerment zone. This comprises up to 20% of the first $15,000 in wages.

Small Business Health Care Tax Credit 

Small business owners who provide health insurance for employees may qualify for a Small Business Health Care Tax Credit, which is designed to support small business owners on a sliding scale and translates to smaller businesses receiving the largest tax credits.

For instance, for a business with over 10 full-time employees, the amount from the tax credit would be generally less than an employer with fewer full-time employees. Additionally, the following restrictions to businesses apply:

• Must have fewer than 25 full-time employees
• Annual wages for the year were less than $56,000 per full-time employee
• Must pay at least half of its employees’ health insurance premiums under a qualifying arrangement

Businesses that qualify could receive the maximum credit of 50% of premiums paid for small business employers and 35% of premiums paid for small tax-exempt employers. However, this credit can only be claimed for two years consecutively. Small businesses that don’t owe taxes this year can apply the tax credit to previous or future tax years.

State-level hiring incentives

A business may also qualify for hiring incentives on a state level. Several states offer tax credits for hiring ex-offenders, people with disabilities and veterans. 

Although state incentives will vary, employers can review the Federal Bonding Program, which is offered through the U.S. Department of Labor. It provides six months of no-cost fidelity bonding coverage to businesses that hire eligible job seekers facing employment barriers. 

To aid employers, the Federal Bonding Program offers some guarantee of employee job honesty. This program is designed to help businesses hire ex-offenders or other at-risk employee groups. It can provide businesses with protection against costs related to dishonest actions.

Reduce taxable income with TEAM Software

Each tax incentive requires its own set of tax forms and requirements. A business that uses an integrated ERP solution to manage payroll can simplify the filing process by determining qualifying employees and wages, as well as the necessary paperwork. With integrated industry software, a business can simplify maximizing tax credits and minimizing taxable income.

TEAM Software is dedicated to ensuring our software solutions meet the ever-changing needs of industry professionals. We’re committed to keeping professionals informed. 

However, it’s important for business owners to perform research. Consider consulting legal and tax advisors with specific questions or concerns. To learn more about using our software solution to take advantage of tax credits, schedule a demo with one of our specialists.