Tax Credits, Small Business, and the American Jobs Act

President Obama laid out his plan Thursday night to jump-start employment in an ambitions American Jobs Act. Whatever form final legislation takes it is likely to include tax incentives for employers. Small employers should not miss the boat on programs that are part of routine employment processing for large companies.

You may not have to wait until Congress acts to take advantage of tax incentives.

Payroll Tax Savings

The President's proposal includes an extension of payroll tax cuts that were enacted in 2010.  The idea is that a reduction in payroll taxes produces immediate cash savings. The good news is that the change does not require special paperwork or applications. Employers simply adjust the rate of deductions. This is most often completed by the payroll provider. Have your accountant check the rate to make certain it is correct.

In addition to the current lower rates the American Jobs Act proposes to cut payroll taxes further on an employer's first $5 million in payroll, a component targeted to assist small business. If this passes the key will be to make certain that payroll providers are up to date.

The plan also adds a payroll tax holiday for increases in wages, to a cap, and adding employers. These kinds of incentives require more record-keeping since they are not across the board. In the event that this is enacted watch for recommended forms, formats or questionnaires that employers and employees may need to complete.

Tax Incentives for New Hires

Employers don't have to wait for any new law to take advantage of some existing tax credits for hiring individuals from specific populations.

Large employers routinely ask new hires if they have recently received public assistance, are veterans, ex-offenders or other categories that provide employer eligibility for specific tax credits. These credits vary, but they definitely add up.

The tough part here is paperwork and filing deadlines. Complete an online application for a big-box store, for example, and you will find an optional questionnaire at the end that captures this information. These employers may also ask for the data upon hire. This is all fed to an internal specialist or external provider who tracks payroll information, obtains signatures and files paperwork according to strict deadlines. Ask your payroll provider or accountant about this service.

Employers can also hire individuals pre-screened as tax credit worthy through non-profit organizations that work to place individuals who may face barriers to employment. They will commonly promote this as one of the reasons to work with the group to find job candidates.

In additioni, President Obama proposed hefty tax credits of from $5,000 to more than $9,000 to hire returning veterans and $4,000 to add someone who has been unemployed for the long term. As with the tax credits described above if these are enacted it will be essential to comply with paperwork and deadline requirements.

I have worked with employers who received significant benefits from these programs. A few years ago I consulted with a company opening new locations in two cities. In both locations they recruited from these special populations and we provided services for pre-screening and identification of tax credit eligibility. One location earned nice fat tax credits while the other lost out on almost $50,000 in these savings because they failed to provide payroll data by the due dates.

Check With an Accountant or Tax Professional

In all cases your accountant will be in the best position to identify how these tax incentives will benefit the company. I worked with one employer who did not apply for these savings due to the ownership structure of the company. If your accountant can't answer the questions ask them to refer you to another with this expertise, speak to a payroll processor or service provider who specializes in this process.