Employment-Related Credits

The tax law encourages you to hire certain workers by permitting you to claim tax credits for certain wages you have paid.

WORK OPPORTUNITY CREDIT

The work opportunity credit (with the exception of the credit for hiring certain veterans) expired at the end of 2011. If the expired portion of the credit is extended, then the following information applies for 2012. A credit applies for hiring workers from certain economically disadvantaged designated groups:

• Recipient of Temporary Assistance for Needy Families (TANF) (someone who is a member of a family receiving TANF or its predecessor, AFDC, for any 9 months during the past 18 months ending on the hire date).
• Qualified veteran (someone with a service-related disability who has been unemployed for any 6 months or more during a 1-year period ending on the hire date).
• Qualified ex-felon (someone convicted of a felony under any statute of the United States or any state, who received food stamps for at least 3 months during the 12-month period ending on the hiring date, and is hired not more than 1 year after the date of conviction or release from prison).
• Designated community resident (someone at least age 18, but not yet 40, on the hiring date, who resides in an empowerment zone, enterprise community, renewal community, or rural renewal community).
• Summer youth employee (someone 16 or 17 years old who performs services between May 1 and September 15, and who resides in an empowerment zone, enterprise community, renewal community, or rural renewal community).
• Vocational rehabilitation referral (someone certified as having a physical or mental disability that constitutes a substantial hardship to employment, including an individual participating in the Ticket to Work and Self-Sufficiency Program).
• Food stamp recipient (someone at least age 18, but not yet 40, on the hiring date who received food stamps for at least 3 months during the 12-month period ending on the hiring date).
• Supplemental Security Income recipient (someone receiving SSI for any month ending within 60 days of the hiring date).
• Long-term family assistance recipient (a member of a family that received long-term family assistance for at least 18 months ending on the hiring date, or who is no longer eligible for assistance and is hired within 2 years of the expiration of eligibility).
• Returning heroes: 40% of the first $6,000 of wages (top credit of $2,400) for hiring a veteran who has been unemployed at least 4 weeks but less than 6 months in the year preceding the hiring date; 40% of the first $14,000 of wages (top credit of $5,600) for hiring a veteran who has been unemployed at least 6 months in the prior 1-year period.
• Wounded warriors (those with a service-related disability): 40% of the first $12,000 of wages (a top credit of $4,800) for hiring any such veteran within a year of release from active duty; 40% of the first $24,000 of wages (top credit of $9,600) for hiring a veteran with service-connected disabilities who has been unemployed at least 6 months in the year preceding the hiring date.

EMPLOYER CREDIT FOR FICA ON TIPS

If you own a food or beverage business, you may claim a credit for the employer portion of Social Security and Medicare taxes (FICA) on tips in excess of those treated as wages for purposes of satisfying the minimum wage provisions of the Fair Labor Standards Act. The credit applies to tips both on premises as well as off premises (e.g., earned for pizza deliveries). The credit is based on the old federal minimum wage rate of $5.15 per hour (even though the federal minimum wage rate is $7.25 per hour).

EMPOWERMENT ZONE EMPLOYMENT CREDIT

This credit expired at the end of 2011. If extended, then the following information applies for 2012. A credit of 20% of the first $15,000 of wages may be claimed for workers who reside in and perform services for an employer located within designated empowerment zones. Wages taken into account for the work opportunity credit may not also be used for the empowerment zone employment credit.

INDIAN EMPLOYMENT CREDIT

This credit expired at the end of 2011. If extended, then the following information applies for 2012. A credit of 20% of the first $20,000 in wages and health care costs in excess of amounts paid in 2003 may be claimed for employing Indian tribe members who live and work on a reservation. The top credit is $4,000 per employee.

EMPLOYER DIFFERENTIAL WAGE PAYMENTS CREDIT

This credit expired at the end of 2011. If extended, then the following information applies for 2012. If you continue some or all of the wages of employees called to active duty (called a differential wage payment), you can take a tax credit of 20% of the differential that does not exceed $20,000. This credit applies only to small employers (on average less than 50 employees) that have a written plan to provide the wage differential. No deduction for compensation can be claimed if the compensation is a differential wage payment used to determine this credit.

WORK-RELATED PERSONAL CREDITS

If you work as an employee or as a self-employed person, you may be eligible for certain personal tax credits.

EARNED INCOME CREDIT

Workers whose income is below threshold amounts may be eligible to claim an earned income credit. This credit is a type of negative income tax—it may be paid even though it exceeds tax liability. The amount of the credit depends on the number of qualifying dependents, if any, and AGI. A portion of the credit may be advanced to workers as a payment in their salary check.

DEPENDENT CARE CREDIT

Whether you are an employee or a business owner, if you hire someone to look after your children under age 13 or a disabled spouse or child of any age so that you can go to work, you may claim a personal tax credit. The credit is a sliding percentage based on your AGI. The top percentage is 35%, but scales back to 20% for AGI over $43,000. The percentage applies to eligible expenses up to $3,000 for 1 dependent and $6,000 for 2 or more dependents.