Strategic hiring practices and tax breaks combine to help attract and retain employees.
By Mark E. Battersby
The American Recovery and Reinvestment Act of 2009 expanded a tax credit (a direct reduction of a company’s tax bill) for hiring new workers from groups such as the disabled, welfare recipients and veterans. Keeping labor costs low is not, however, limited to this one tax credit.
Some tax breaks help cut the cost of fringe benefits offered to attract and retain good workers. Other deductions and credits help slash the cost of making a workplace or the equipment used by workers more accessible to disabled workers.
The Recovery Act expanded an already existing tax credit for hiring new workers from groups such as the disabled, welfare recipients and veterans. The Work Opportunity Tax Credit (WOTC) rewards employers that hire members from any one of nine targeted groups, with a tax credit equal to 40 percent of qualified first-year wages (with different amounts for qualified veterans and summer youth hires). Generally, the WOTC is a percentage of first-year wages up to $6,000 per employee ($12,000 for qualified veterans, and $3,000 for qualified summer youth employees). The ceiling is $2,400 for each new adult hire, $1,200 for each new summer youth hire, $4,800 for each disabled vet hire, and $9,000 for each long-term family assistance recipient hired over a 2-year period.
State labor departments or similar state or county government agencies certify (as well as find and often train) workers who qualify under the WOTC program. The workers come from so-called “targeted groups” that include: Aid to Families with Dependent Children recipients, qualified veterans, qualified ex-felons, high-risk group members, vocational rehabilitation referrals, summer youth employees, qualified food stamp recipients, SSI recipients or long-term family assistance recipients.
Not all of the groups targeted by lawmakers and eligible for this unique tax credit are suitable candidates for the demanding tasks normally associated with a specialty fabric products business. Another tax credit helps employers adapt the workplace or equipment to meet the needs of the disabled.
Thanks to the Americans with Disabilities Act of 1990, an eligible small business is entitled to a nonrefundable income tax credit for expenditures incurred to make a business accessible to disabled individuals—both customers and workers.
The amount of this credit is 50 percent of eligible access expenditures for a year that exceed $250 but do not exceed $10,250. Limited to businesses with a gross income of less than $1 million and no more than 30 full-time employees, the eligible expenditures include those used to acquire or modify equipment or devices for disabled individuals.
Leased employees. The traditional full-time employee is not the only hiring option available to businesses, nor is full-time employment necessary in order for a worker to qualify under the WOTC program. While an employee must have completed 120 hours of service for the wages to qualify, if that employee performs less than 400 hours of service, the employer is still entitled to a credit of 25 percent. (For 400 hours or more, again, the credit is 40 percent.)
Recently, more and more employers are turning to alternative arrangements, including temporary employees, part-timers, leased employees and independent contractors. Handled properly, many of these strategies can save money, and may also save you headaches, as well.
If payroll, paperwork, personnel hassles and employee manuals sound like too much work and too much time, employee leasing might be one answer. Employee leasing is a means of managing human resources without all of the administrative hassles. By combining the employees of several companies into one larger pool, employee leasing companies (also known as professional employer organizations or PEOs), offer business owners better rates on health care and worker compensation coverage.
Temporary employees. If staffing needs are seasonal, with extra workers needed during holidays or during heavy production periods, then hiring temporary employees is a helpful tactic, and agencies can offer valuable assistance.
Because most temporary help companies screen, and often train, their employees, companies who choose this option stand a better chance of obtaining the quality employees they need. Temporary help companies also offer other benefits: they help keep overhead low, and save time and money on recruiting efforts.
Using this option, you don’t have to find, interview or re-locate workers. Nor does the cost of health or unemployment benefits, workers’ compensation insurance, profit-sharing, vacation time or other benefits come out of your budget, since many temporary help companies provide these resources to their employees.
Part-time employees. Another way of cutting overhead and benefit costs while gaining flexibility is by hiring part-time workers such as students, seniors, stay-at-home moms and dads and the disabled. Under current federal law and most state laws, an employer is not required to provide part-timers with medical benefits. Among the other advantages of using permanent part-timers is that it’s possible to get more commitment than from a temporary employee but more flexibility than you might expect from a nine-to-fiver.
Independent contractors. When is a worker not an employee? When he or she is an independent contractor. Workers often like the label of “independent contractor” because of increased tax benefits and deductions, the absence of payroll tax withholding and the flexibility in working hours.
Employers prefer to use independent contractors because these workers are not subject to payroll taxes and need not be included in fringe benefit programs such as health insurance and retirement plans. It is also true, however, that many employers are now facing increasing scrutiny over their use of independent contractors, and not just by the IRS.
State agencies for unemployment and workers’ compensation are also questioning whether independent contractors are really all that “independent.” Although re-classification of a worker most often occurs after an audit, either a worker or an employer can ask the IRS to determine whether the worker is an employee or a nonemployee for federal employment tax purposes.
Education and training
Over the years, survey after survey has shown that it is not money alone that attracts new workers and keeps existing employees on the job. In addition to management styles and employee empowerment strategies, it’s a company’s benefits that often make the difference. Now, thanks to some unique tax laws, every smart business owner can not only afford to offer fringe benefits to their workers, but they may even be able to benefit themselves.
Because our lawmakers want to encourage education and training, the tax rules contain an unusual number of incentives and tax deductions for individuals, both employees and self-employed business owners, who continue with their educations. Training and educational expenses, whether paid for by an employer, by a supplier or equipment distributor, or subsidized or sponsored by an industry group or association, can be considered fringe benefits because they are, for the most part, tax-free to the recipient.
The employee, employee-owner or self-employed professional receiving training or education enjoys an offsetting tax deduction for educational expenses not covered by the employer/business. So everybody profits—especially the specialty fabrics products business that will benefit from smarter, better educated and better trained employees and claim a tax deduction for educational expenses paid, all the while providing their employees with a valuable, tax-free fringe benefit.
Adding employees from targeted groups, and using part-time, temporary, leased workers or independent contractors, can significantly slash the cost of labor and improve the bottom line. When you’ve determined exactly what your labor needs are, and what your employees want in return, consult your tax advisor on the best strategies (and the most credits) for your business.