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Trends in Tax Credits: Federal Employment Incentives

While the Federal Work Opportunity Tax Credit (WOTC) program can deliver significant tax credits to eligible employers, many companies don’t take full advantage of a staggering number of additional tax credits and incentives beyond WOTC that may be available to them at the federal, state and local level. Over the next three weeks, we’ll review some important trends in tax credits in 2019. This week, check out these important employment incentives:

Three Important Incentives

There are federal employment-based programs that companies should pay attention to: The Federal Empowerment Zone Credit, Employer Credit for Paid Family and Medical Leave, and the Federal Indian Employment Credit.

The Employer Credit for Paid Family and Medical Leave tax credit applies to eligible employers that provided paid family and medical leave to their employees, beginning in 2018 and ending in 2019.

As of mid-2018, the Federal Empowerment Zone Credit and the Federal Indian Employment Credit expired, but companies may have the opportunity to claim applicable credits retroactively. At the same time, these types of federal programs are candidates for re-instatement, which speaks to the need for companies to continually monitor legislative changes that may impact tax credits and incentives.

Federal Empowerment Zone Credit (FED EZ)

Empowerment Zones are federally designated urban and rural communities that have high poverty and emigration levels. The FED EZ credit was extended by the Bipartisan Budget Act of 2018 (Pub. L. No. 115-123) to include qualified wages paid to qualified employees through December 31, 2017.

In order to stimulate activity in these areas the government has authorized a tax credit for providing employment to qualified individuals.

  • The credit is 20% of wages (up to $15,000) paid to qualified employees.
  • Maximum credit of $3,000 per employee per year of qualified employment.
  • Employers must account for the WOTC and FED EZ interaction.
  • The credit can be captured retroactively; 1 year carryback and 20 year carry forward.

Federal Indian Employment Credit (FED IEC)

The Indian Employment Credit (IEC) is a federal tax credit offered to employers who conduct business on tribal lands and employ registered native americans and spouses of registered native americans. The FED IEC was extended by the Bipartisan Budget Act of 2018 (Pub. L. No. 115-123) to include qualified wages paid to qualified employees through December 31, 2017.

  • The credit is 20% of wages and health insurance costs (up to $20,000) paid to qualified employees.
  • Maximum credit of $4,000 per employee per year of qualified employment.
  • Employers must account for the WOTC and FED IEC interaction when claiming both credits.

Employer Credit for Paid Family and Medical Leave

The Tax Cuts and Jobs Act of 2017 represents a new opportunity for companies to offset the costs associated with wages paid to employees on family or medical leave.

The Tax Cuts and Jobs Act of 2017 is available to eligible employers who continue to pay wages to qualifying employees during family and medical leave during the 2018 and 2019 tax years.

  • General business tax credit equal to 12.5% of wages paid to qualifying employees during paid family and medical leave if the rate of payment for leave is not less than 50% of the wages normally paid to an employee.
  • The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%.
  • The maximum amount of leave allowed to be taken into account for any employee for purposes of this tax credit is 12 weeks.

Dana Fox is the Vice President of Alliances with ADP. ADP has over 40 years of tax credit experience across national, state and local levels, ADP has helped its clients capture over $1 billion in tax credits in a single year. To learn more, visit  https://www.adpinfo.com/rd-tax-credit.

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