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Employment-related credits.

Many attractive business credits are available to employers, such as the welfare-to-work credit, work opportunity credit, FICA tip credit, empowerment zone credit and employer-provided childcare credit. The effectiveness of the various employment credits has been questioned since their inception. Several of these credits are scheduled to expire on Dec. 31, 2003, but may be extended. Tax advisers should monitor their availability in future years; Congress uses tax credits to motivate employers to provide jobs and benefits to disadvantaged workers.

Welfare-to-Work Credit

The Sec. 51A welfare-to-work credit is available to employers of eligible employees who entered employment at the organization between 1998 and 2003. The credit seeks to (1) ease the transition from welfare to work by increasing targeted individuals' access to employment; and (2) give employers an added incentive to hire them. An "eligible employee" is any individual certified by a state employment security agency (as defined in Sec. 51 (d)(2)(B)) as being a member of a family that has received assistance under the Aid to Families with Dependent Children (AFDC) program. According to Sec. 51A(d)(1), each individual must be employed at least 180 days or have completed 400 hours of services for the employer.

The credit is not available, under Sec. 51(i), for any individual (1) related to the employer, (2) who has previously worked for the employer or (3) who works more than 50% of the time outside the employer's trade or business.The employer can take a credit based on up to $10,000 of qualified wages per year per eligible employee, for two years. For the first year, an employee's qualified wages are multiplied by 35%, for a $3,500 maximum credit; for the second year, wages are multiplied by 50%, for a $5,000 maximum credit. Qualified wages can include cash, health or accident plan payouts or contributions or educational or dependent care assistance.

Work Opportunity Credit

The Sec. 51 work opportunity credit is limited to eligible employees who begin work for the employer after Sept. 30, 1996 and before 2004. Under Sec. 51 (d)(1), eligible employees include individuals who are members of one of the following target groups:

1. Qualified members of families receiving assistance under the AFDC program (or a successor program);

2. Qualified veterans;

3. Qualified ex-felons;

4. High-risk youth;

5. Vocational rehabilitation referrals;

6. Qualified summer youth employees;

7. Qualified members of families receiving food stamp assistance;

8. Qualified supplemental security income recipients; and

9. "New York Liberty Zone business employees"

Generally under Sec. 51(a), the credit for any year is qualified wages (up to $6,000, under Sec. 51(b) and (d)(7)(B)(ii)), multiplied by 40% for employees who completed at least 400 hours of service for the employer.The rate drops to 25% of qualified wages if the employee completed at least 120 hours, but less than 400 hours. There is no credit if the employee worked less than 120 hours; the maximum credit is $2,400. According to Sec. 51 (c), "qualified wages" are defined as under the FUTA; see Sec. 3306(b). For summer youth employees, employers can take only $3,000 of wages into account, for a maximum $1,200 credit. Under Sec. 51 (d)(12)(A), the employer must either receive the required certification from the designated local agency by the time employment begins, or must complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity and Welfare-to-Work Credits, and submit it to the agency within 21 days after the employee begins work, as part of a written request for such certification.

No deduction is allowed for the portion of wages equal to the above credits claimed for the tax year. Nor can an employer claim both a work opportunity credit and a welfare-to-work credit for the same employee for the tax year; further, wages taken into account for these credits cannot be used for the empowerment zone credit. The credits are subject to the overall limits on the general business credits that can be taken in any tax year. An employer can carry unused credits back one year and forward 20 years.

FICA Tip Credit

Sec. 45B offers a credit to employers whose employees receive cash tips from customers. Under Sec. 45B(b)(2), the tips received must be in connection with delivering or serving food or beverages for consumption either on or off of the employer's premises.

Employees are required to report tips to employers; however, employers can take the credit even if employees did not report tips. The credit only applies to tip income that brings employee wages above the minimum wage level.Thus, no credit is available to the extent tip income brings wages to the minimum wage level. No deduction is allowed for any amount taken into account in determining the credit. The credit is the employer's portion of FICA taxes paid on the tips and is 7.65% times the tips generated in excess of the minimum wage.

Empowerment Zone Credit

The Sec. 1396(a) empowerment zone credit is allowed for portions of the wages of qualified employees. These are zones designated by the Secretary of Agriculture or Housing and Urban Development that have high concentrations of low-income residents and meet various other requirements. The credit allowed under Sec. 1396(b) is generally 5%-20% of the first $15,000 of wages for each qualifying employee.

A "qualified zone employee" is defined by Sec. 1396(d) as one who performs substantially all of the services for the employer within an empowerment zone and whose principal place of abode is within such zone. A qualified employee cannot be related to the employer; further, certain types of business (e.g., golf courses and massage parlors) are disqualified by Sec. 1396(d)(2).The employer's deduction for wages paid for the tax year must be reduced by the credit taken.

Employer-Provided Childcare

Sec. 45F(a) and (b) allow a 25% credit for qualified childcare expenditures and a 10% credit for qualified childcare resource and referral expenditures, up to a $150,000 maximum. The three types of qualified childcare expenditures under Sec. 45F(c)(1) include: (1) amounts paid or incurred to acquire, construct, rehabilitate or expand property; (2) operating costs (which include the expense of training employees); and (3) amounts paid or incurred under a contract with a qualified childcare facility to provide services to employees.

Qualified childcare resource and referral expenditures are defined by Sec. 45F(c)(3) as amounts paid or incurred "under a contract to provide childcare resource and referral services to an employee." If the facility ceases to be used for childcare, the credit is subject to recapture. The recapture percentage ranges from 100% for the first three years, decreases by 15% per year in years four through eight and is 10% in each of years 9 and 10.The employer cannot take a deduction for any cost allowed as a credit, and must reduce its basis in the facility by the creditable portion of the costs of acquiring or constructing it.

State Issues

Tax advisers should review state requirements for these credits; some states may not allow the Federal business credits available to employers. FROM PATRICK KOPPLIN, CPA, AND NICOLE ROBICHAUX, PKF TEXAS, HOUSTON, TX


Kevin F. Reilly, J.D., CPA

U.S. National Director of Taxation

PKF Mid-Atlantic

Fairfax, VA
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Author:Reilly, Kevin F.
Publication:The Tax Adviser
Date:Nov 1, 2003
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