Small Business Owners Tax Credits
Small business owners should check out two key tax credits and a special relief program that could provide significant tax benefits during 2012.
The expanded credit for hiring veterans and the credit for employer-provided health care coverage can provide tax savings to eligible small businesses when they file their 2012 federal income tax returns. In addition, substantial relief from past payroll tax obligations is available to eligible employers who agree to reclassify their workers from independent contractors to employees in the future.
Here are details on each of these items from the IRS.
Expanded Tax Credit for Hiring Veterans
A tax law change enacted late last year now provides an expanded Work Opportunity Tax Credit (WOTC) to employers that hire eligible unemployed veterans. The credit can be as high as $9,600 per veteran for for-profit employers or up to $6,240 for tax-exempt organizations. The amount of the credit depends on a number of factors, including:
- The length of the veteran’s unemployment before hire;
- The hours a veteran works; and
- The amount of first-year wages paid.
Employers who hire veterans with service-related disabilities may be eligible for the maximum credit.
Certification requirements apply to these new hires. Normally, an eligible employer must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. But under a special rule, employers have until June 19, 2012, to complete and file this form for veterans hired on or after November 22, 2011, and before May 22, 2012. The 28-day rule will again apply to eligible veterans hired on or after May 22. This form can be faxed or electronically transmitted to the state workforce agency, as long as the agency is able to receive the certification forms that way.
Small Employers’ Health Care Coverage Tax Credit
Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for the small business health care tax credit. Enacted two years ago, the credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
Eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014. Targeted to small employers that primarily employ low and moderate-income workers, the maximum credit in tax-years 2010 through 2013 is 35 percent of premiums paid by small businesses and 25 percent of premiums paid by tax-exempt organizations, increasing to 50 percent and 35 percent, respectively, in 2014.
If you have questions about the veterans’ tax credit or the small employers health care coverage tax credit, contact your tax adviser.
Payroll Tax Relief for Some Businesses
Many businesses can now resolve past worker classification issues by voluntarily reclassifying their workers at a relatively low tax cost.
Already, the IRS reports, 540 employers have been approved to participate in the new IRS Voluntary Classification Settlement Program (VCSP) since it was launched last September.
The VCSP is available to many businesses, tax-exempt organizations and government entities that currently treat their workers or a class or group of workers as non-employees or independent contractors, and now want to treat these workers as employees in the future. To be eligible, an employer must:
- Consistently have treated the workers in the past as nonemployees.
- Have filed all required Forms 1099 for the workers for the previous three years.
- Not currently be under audit by the IRS or the Department of Labor or a state agency concerning the classification of these workers.
Here are the results for employers accepted into the program:
- They will pay 10 percent of the amount of employment taxes that would otherwise have been due on compensation paid for the most recent tax year to the workers, calculated under the reduced rates of section 3509 of the Internal Revenue Code.
- No interest or penalties will be due.
- The employers will not be audited on payroll taxes related to these workers for prior years.
- Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.
If you are interested in participating in the IRS program, contact your tax adviser. It may not make sense in some situations.
Here are some of the potential risks.
- There are other routes to take with the IRS that might result in better outcomes for some employers.
- Participation in the voluntary program with the IRS might open an employer to audits and penalties by state agencies that view participation as an admission of wrongdoing.
- Employees themselves may react against the employer. An independent contractor worker whose status is changed to employee may consider making a claim against the employer for a variety of benefits, such as previously unreimbursed health insurance benefits, for inclusion in an employer’s pension plan, and for unreimbursed business-related expenses.
- Reclassifying an independent contractor as an employee might expose the employer to state legal liabilities. For example, an independent contractor injured while performing work for the employer would not be eligible for workers’ compensation benefits. Suppose then that two months after incurring an injury, a worker is reclassified as an employee. That person now has an opportunity to claim workers’ compensation benefits.
Warning: These risks highlight how imperative it is for an employer to first consult with an adviser familiar with tax law, worker classification law and labor law before acting to pursue the VCSP program with the IRS.