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The IRS recently highlighted two existing tax incentives and a new program for employers to mark national small business week: the expanded WOTC, the small employer health insurance tax credit, and the voluntary classification settlement program.

IRS Highlights Certain Small Business Tax Credits

  • 6/6/2012

IRS Highlights Certain Small Business Tax Credits

The IRS recently highlighted two existing tax incentives and a new program for employers to mark national small business week: the expanded Work Opportunity Tax Credit (WOTC) for veterans, the small employer health insurance tax credit, and the Voluntary Classification Settlement Program (VCSP).

Work Opportunity Tax Credit for veterans

The Work Opportunity Tax Credit (WOTC) rewards employers that hire individuals from target groups, including veterans. The Vow to Hire Heroes Act of 2011 (Heroes Act) enhanced the WOTC to include any veteran who is certified as being long- or short-term unemployed. The Heroes Act also enhanced the WOTC for unemployed veterans with service-connected disabilities. In addition, it allows tax-exempt employers to claim a credit against their Federal Insurance Contribution Act (FICA) taxes for hiring a qualified veteran.

Comment: The Heroes Act did not extend the WOTC for other target groups; for them, the credit expired after 2011. The enhancements to the WOTC for veterans apply to qualified veterans hired after November 21, 2011, and before January 1, 2013.

Employers must file Form 8850, Pre-Screening Notice and Certification Request for WOTC with their state workforce agencies within 28 days after the person begins work. The IRS reminded employers that they have until June 19, 2012, to file for veterans hired on or after November 22, 2011, and before May 22, 2012. The 28-day rule will apply to veterans hired on or after May 22, 2012.

Small business health care credit underutilized

The Patient Protection and Affordable Care Act of 2010 (PPACA) created the Code Sec. 45R credit. For tax years 2010 through 2013, the maximum credit is 35 percent of health insurance premiums paid by small business employers (25 percent for small tax-exempt employers).

The IRS reminded employers that the credit is scheduled to increase to 50 percent for small business employers (35 percent for small tax-exempt employers) after 2013. The employer must have fewer than 25 full-time equivalent employees (FTEs) for the tax year, the average annual wages of its employees for the year must be less than $50,000 per FTE, and the employer must maintain a qualifying arrangement for its employees.

Comment: Sole proprietors, partners of a partnership, shareholders owning more than 2 percent of the stock in an S corporation, and any owners of more than 5 percent of other businesses, are not taken into account as employees for purposes of the credit. Family members of these owners and partners are also not taken into account as employees.

Voluntary Classification Settlement Program

Employers participating in the Voluntary Classification Settlement Program (VCSP) can voluntarily reclassify their workers as employees for future tax periods for employment tax purposes. The IRS reminded employers that the VCSP is available to many businesses, tax-exempt organizations, and government entities. The IRS has not set a deadline to participate in the VCSP.

Employers can request to participate in the VCSP by filing Form 8952. Generally, employers must consistently have treated the workers in the past as non-employees, filed all required Forms 1099 for the workers for the previous three years, and not be under examination concerning the classification of the workers. Taxpayers accepted into the VCSP pay 10 percent of the amount of employment taxes calculated under the reduced rates of Code Sec. 3509(a). The taxes are paid on compensation paid for the most recent tax year to the workers being reclassified, the IRS explained.

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