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Hire Purpose

Bringing disadvantaged employees aboard has never been so rewarding--and we're not just talking about the tax credits you'll get.

If you're thinking about adding staff, don't neglect the tax consequences of your plans. Two tax credit opportunities, for example, could provide some important savings and help defray the costs of keeping an employee on your payroll. These credits were extended through 2003 by the Job Creation and Worker Assistance Act of 2002.

The first type of tax opportunity is the work opportunity credit. It lets employers claim a credit equal to 40 percent of the first $6,000 of qualified wages, or a maximum of $2,400, during an employee's first year of employment. This applies to employees who work at least 400 hours during the year and belong to certain disadvantaged groups, such as qualified summer youth employees, families receiving food stamps, qualified veterans and persons receiving certain Supplemental Security Income benefits. (For a complete list, go to www.irs.gov and type "work opportunity credit" in the search bar.) If the employee works less than 400 hours, but at least 120 hours, the credit is reduced to 25 percent of qualified wages. (No credit is available for employees working less than 120 hours in the year.)

The other is the welfare-to-work credit, which is available to employers who hire qualified long-term family assistance recipients who begin work on or before December 31, 2003. It is more generous than the work opportunity credit and, as a result, it's usually more beneficial to claim. The credit is equal to 35 percent of up to $10,000 of wages in the first year and up to 50 percent of up to $10,000 in the second year of employment, for a two-year maximum credit of $8,500 per employee.

"The federal government is trying to make it more advantageous for employers to get people off long-term family assistance or welfare," explains Mallory Collier, tax manager for accounting firm Jackson, Rolfes, Spurgeon & Co. in Cincinnati.

To claim the work opportunity credit on your tax return, attach IRS form 5884. For the welfare-to-work credit, attach IRS form 8861. But remember, if you claim the welfare-to-work credit for someone you hire, you can't claim the work opportunity credit for the same employee.

For both credits, you are required to file forms with your state coordinator within 21 days of the employee's first day of work. Don't be put off by the amount of paperwork you have to do-your accountant can help you with that. Says Collier: "These credits not only present an excellent tax-saving opportunity for entrepreneurs, but they can also give potential employees in disadvantaged groups a good chance for steady employment."


Great Falls, Virginia, writer Joan Szabo has reported on tax issues for more than 15 years.

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This article was originally published in the April 2003 print edition of Entrepreneur with the headline: Hire Purpose.

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