Another contributing factor to payroll cost is the associated tax burden. Savvy operators understand the employee component of payroll, but often neglect related decisions that can help mitigate such payroll costs. For example, a sizeable portion of labor overhead can be indirectly recouped through wage-based income tax credits. These incentives turn labor expenditures into tax savings. There are several such programs currently available, some of which are specific to California and others that are available on a national level.

California Enterprise Zone Credit
California Enterprise Zones are geographically-targeted areas. Employers located in them are permitted, simply by virtue of location, to claim income tax credits for qualified equipment purchases and new hires. These credits can be documented four years retroactively to claim refunds, with any excess credits carry forward indefinitely. Just one qualified employee can generate over $37,000 if that employee is retained for five years, and Enterprise Zones include many different areas throughout California.

California New Jobs Credit
Based on the number of full-time employees a business adds for a given taxable year, the California New Jobs credit entitles a business to a $3,000 income tax credit for each additional full-time employee. Whether or not a business added full-time employees is determined by a payroll analysis and computation. This incentive must be claimed on an originally-filed return.

Federal Work Opportunity Tax Credit
This Work Opportunity Tax Credit is available to businesses who hire targeted groups of individuals such as veterans or people on government assistance. Qualified hires must be documented and registered with the government within the first 28 days of employment.

Federal Health Insurance Premium Credit
Small business should pay special attention to this tax credit, which began in 2010. It allows employers to recover up to 35% of health insurance premiums paid for employees. In 2014, that number will increase to 50% of the premiums. Businesses supporting more than 25 full-time equivalent employees are not eligible.

Federal FICA Tip Credit
The employer’s share of FICA taxes on employees’ tips is available as a tax credit for restaurants and bars. Prior to 2007, this credit could not offset alternative minimum tax and was consequently not of much value, but since then it has been utilized by most operators to significantly reduce their federal tax liabilities.

Author: Rob Campbell, Employment Tax Credits Manager