If you hire an employee for your Schedule C business, you can qualify for several valuable tax credits.
Each credit is different, and certain limitations apply to all or most employer tax credits.
Remember, tax credits are the best. They beat deductions. Note the difference below (using the 32 percent bracket):
- A $1,000 deduction for wages reduces your income taxes by $320.
- A $1,000 credit reduces your taxes by $680 ($1,000 - $320).
Many tax credits are not available if you hire a person related to you, including children, stepchildren, a spouse, parents, siblings, step-siblings, nephews, nieces, uncles, aunts, cousins, or in-laws.
Eight Valuable Tax Credits for Business Owners
Below are listed the eight non-refundable tax credits that Schedule C business owners can claim when they hire employees.
1. Work Opportunity Tax Credit (WOTC)
The WOTC rewards employers for hiring employees from groups the IRS has identified as having “consistently faced significant barriers to employment.”
2. Family and Medical Leave Credit
Federal law doesn’t require that you give paid leave to your employees who need to take time off for family reasons (such as the birth of a child) or due to their illness or that of a family member. (A few states require some paid leave that’s funded through payroll deductions.)
But if you choose to provide such paid leave, the federal tax code may reward you with a family and medical leave tax credit.
3. Credit for Small Employer Health Insurance Premiums
If you have fewer than 50 full-time-equivalent employees, you are not required to provide your employees with health insurance. But if you elect to do so, you may qualify for the small business health care tax credit. This tax credit is available to eligible employers for two consecutive tax years.
4. Credit for Small Employer Pension Plan Start-Up Costs
This credit is for the cost of setting up an employee pension plan, including a new 401(k) plan, 403(b) plan, defined benefit plan (a traditional employee pension plan), profit-sharing plan, SIMPLE IRA or SIMPLE 401(k), or SEP-IRA.
The costs covered by the credit include the expenses to establish and administer the plan and to educate employees about retirement planning.
5. Credit for Employer-Provided Childcare Facilities and Services
This little-used credit is intended to encourage employers to provide childcare to their employees. There are two ways to get the credit:
- Build, acquire, rehabilitate, or expand an on-site childcare facility for your employees’ children, and help pay to operate it.
- Contract with a licensed childcare program, including a home-based provider, to provide childcare for your employees.
The second option is more realistic for smaller businesses. Businesses often partner with childcare companies such as the Learning Care Group, Bright Horizons, and KinderCare to offer this benefit.
6. Empowerment Zone Employment Credit
Is your business located in one of the designated empowerment zones?
These are areas of high poverty and unemployment identified by the U.S. Department of Housing and Urban Development or Secretary of Agriculture. You can find a list and map on the HUD website.
Key point. You might be surprised which places the government designates as having high poverty and unemployment. It’s worth checking out.
You can claim a credit equal to 20 percent of the first $15,000 in wages you pay to full- or part-time employees who both live and work in an empowerment zone. Thus, the maximum credit is $3,000 per employee (20 percent x $15,000). The employees must work for you for at least 90 days.
7. Credit for Employer Differential Wage Payments to Military Personnel
This credit is available if you have an employee in the military reserves who is called to active duty for more than 30 days. If you continue to pay the employee all or part of that employee’s wages while he or she is on active duty, you can claim a credit equal to 20 percent of the payments, up to $20,000.
8. Indian Employment Credit
This credit is available only if you hire an enrolled member of an American Indian tribe who both lives and works on an Indian reservation. If this is the case, you may claim a tax credit equal to 20 percent of the wages and health insurance benefits you provide the employee. The Indian employment credit ends December 31, 2021.
See our blog on Six Tax Credits Business Owners Without Employees Can Claim.