Paying taxes is a necessary evil of running a small business
Just the mere thought of year-end can really stress some folks out. Paying federal, state and sometimes local small business taxes can take a big bite out of a company’s bottom line. And sometimes it can feel like all of that hard-earned income is going straight into Uncle Sam’s coffers.
Fortunately, if you take advantage of a handful of small business tax credits they can help reduce the sting.
Note that these are just a few tax credits available to qualified small businesses. Always consult your accountant to make sure you’re taking advantage of the maximum available.
Tax Credits vs. Tax Deductions
First things first. It’s important to keep in mind that there’s a definite distinction between tax credits and tax deductions. Small business tax deductions lower total taxable income. Small business tax credits lower the total tax bill.
So, what’s the big difference?
Imagine that you made $200,000 in taxable income. A tax deduction of $4,000 would reduce that taxable income to $196,000. A tax credit, on the other hand, would reduce your actual overall tax bill.
Because tax credits reduce your tax bill and not taxable income, a tax credit provides more of a savings than a deduction you could get in the same amount.
The 3 tax credits available to small business owners
- Disabled Access Credit (Form 8826)
If your company incurs expenses for modifying your business to provide better access for disabled employees or customers, you might be eligible to take this tax credit. The max credit you can receive is 50% of $10,000 worth of expenditures.
- Employer-Provided Child Care Facilities and Services Credit (Form 8882)
A business can qualify for this federal tax credit if you pay daycare expenses for your employees. The credit equals 25% of the daycare or baby-sitting expenses you pay up to $150,000 each year.
An employee can actually benefit more from this credit than they would from the standard Child and Dependent Care Tax Credit they can take on their personal tax returns. For example, if the employee pays $5000 for child care, the max credit they are allowed is $1750 ($5000 x 35%). So, the employee pays $3250 out-of-pocket for their child care services ($5000 – $1750 = $3250). If you, as the employer, directly pay $5000 to a daycare facility for that employee’s child, they aren’t out that $3250. It’s important for the employees to understand that the child care payments you make that are more than $5,000 will be added to their gross wages. Also, bear in mind that, as the business owner, you can not only take advantage of the tax credit, but also the benefit. If your business is incorporated and you’re an employee of that corporation you, too, can reap the benefits.
- Work Opportunity Tax Credit and Welfare-to-Work Credit (Form 5884)
The Work Opportunity Tax Credit (WOTC) is another tax credit given to companies that hire employees from certain groups that experience considerable barriers to employment, such as veterans, ex-felons, etc. Other job seekers who are on public assistance can also experience barriers to employment such as lack of transportation, education or child care.
These tax credits are calculated based on time worked and wages paid to the employees, and the amount of credit varies depending on the target group. The tax credit for veterans, ex-felons, etc. is 40% of their first-year wages up to $6000 if the employee works at least 400 hours that year. If the employee works less than 400 hours but at least 120 hours you can get a 25% tax credit. The tax credit for an employee who is a long-term family assistance recipient is 40% of their first-year wages up to $10,000 and 50% of their second-year wages up to $10,000. The employee must work at least 180 days or 400 hours.
There is no limit to how many people a company can employ to receive these tax credits.
How to Claim Tax Credits
When filing your year-end taxes, you have to file the related forms like the examples we linked above. If you plan to take advantage of multiple tax credits, you also have to file Form 3880 for General Business Credits. Carefully review this form as it covers many more credits that your company might be eligible to receive.
Paycor Can Help
Making sure you’re taking all possible deductions and using the credits available to your business can be stressful and overwhelming, especially if you’re going it alone. Our experts can help you with complex topics such as payroll tax compliance so you can focus on running your business and paying your employees. Our tax team assisted companies with more than 450,000 tax notices in just the past year. Talk to a consultant to learn more.