Financial

Uncle’s Helping Hand With Payroll Costs

By Mark E. Battersby / Published November 2021

Many employers are already struggling to keep employees and attract new workers. However, if or when the controversial bipartisan infrastructure bill becomes a reality, many pressure cleaning businesses will have to increase their workforces. 

     Small businesses are finding it increasingly more difficult—and expensive—to compete with large employers offering hiring bonuses and other perks to attract new workers. In fact, many businesses are being forced to offer higher pay and more benefits—efforts helped by several of Uncle Sam’s often overlooked tax breaks.

     Thanks to the unique employee retention credit (ERC), many pressure washing businesses can get money back from the government through a credit against their payroll taxes. But, first there is the work opportunity tax credit (WOTC) for hiring workers from “targeted” groups. 

The Work Opportunity Tax Credit

     The WOTC is available for most pressure cleaning businesses, including pass-through entities such as S corporations and partnerships. The WOTC is a tax credit, a direct reduction in the pressure washing operation’s tax bill, for hiring a worker from selected categories.

     The credit isn’t limited to any specific dollar amount, although it can’t exceed the amount of the pressure cleaning operation’s tax liability. Generally, the credit equals 40 percent of up to $6,000 of a qualified employee’s first-year wages, for a maximum credit of $2,400 per worker who has worked at least 120 hours for the employer. 

     The WOTC can only be claimed for hiring a member of one of the following targeted groups:

• Qualified veterans (including disabled veterans). The veterans must be unemployed for at least four weeks, but less than six months in the one-year period ending on the hiring date.
• Qualified recipients of aid to families with dependent children or a successor program. These individuals are part of a family receiving assistance from a state plan approved under Part A of Title IV of the Social Security Act.
• Long-term family assistance recipients. This applies to family members who receive assistance under a Title-A program.
• Ex-felons. A qualified ex-felon is a person hired within a year of being convicted of a felony or being released from prison.
• Designated community residents (DCRs). The worker must reside in an empowerment zone, enterprise zone, or rural renewal community and continue to live there after placement.
• Vocational rehabilitation referrals. This applies to someone with a physical or mental disability who has been referred to the employer during or after rehabilative services under certain programs.
• Supplemental Nutrition Assistance Program (SNAP) recipients. This covers members of a family who received SNAP benefits for the previous six months or at least three of the previous five months.
• Supplemental Security Income (SSI) recipients. A person is a qualified SSI recipient for any month in which he or she received SSI benefits within 60 days of the hiring date.
• Qualified long-term unemployment recipients. A qualified long-term unemployment recipient is someone who has been unemployed for not less than 27 consecutive weeks at the time of hiring and received unemployment compensation during this time.

     Since hiring workers from within these categories will require guidance, before workers begin work certification may be required. Employers must obtain certification that an individual is of a targeted group from a designated local agency (DLA), usually the state employment security agency. This is done by submitting Form 8850 (Pre-Screening Notification and Certification Request for the Work Opportunity Credit) to the DLA within 28 days of that individual beginning work.

     Unfortunately, the WOTC cannot be claimed for an employee related to the employer or for any employee who was previously employed by the employer. Nor can the WOTC be claimed for amounts paid under a federally funded on-the-job training program.

     While the WOTC may prove to be of enormous financial benefit for employers between now and 2025, any wages used to claim the WOTC must be taken into account when claiming another worker-hiring credit, the Employee Retention Credit (ERC), the fast-expiring program that offers businesses money back on a percentage of wages paid to their employee before December 31, 2021.

The Employee Retention Credit

     Geared toward small and mid-size businesses, the Employee Retention Credit (ERC) is designed to encourage businesses to keep employees on their payroll. (According to an IRS news release from Jan. 26, 2021, the ERC could be accessed by employers for the first and second quarters of 2021. However, in late April the American Rescue Plan extended the ERC through December 31, 2021). In addition to having 500 or fewer employees, an employer’s eligibility is based on having gross receipts of less than 80 percent in a calendar quarter in 2021 (versus the earlier 50 percent amount for 2020) compared to the same quarter, in 2019. Thus, any pressure cleaning operation’s gross receipts that declined more than 20 percent in 2021 may be eligible for the credit.

     The credit remains at 70 percent of qualified wages up to a $10,000 limit per employee per calendar quarter producing a maximum of $7,000 per employee per calendar quarter—up to $28,000 per year for each employee. If the amount of the employer’s tax credit is more than its share of those payroll taxes owed for a given quarter, the excess will be refunded.

     A pressure washer can also claim this credit even if the company is receiving money from the Payroll Protection Program provided, of course, the same wages aren’t used in both the credit and forgiveness calculations. In short, no “double-dipping” is allowed, although some employers might be able to go back to 2020 and retroactively claim this credit.

     To qualify going into the third and fourth quarters of 2021, the rules remain essentially the same as earlier. Eligible employers will report their total qualified wages and the related health insurance cots for each quarter on their employment tax returns (generally, Form 941) for the applicable quarter. If a reduction in the operation’s employment tax deposits is not
sufficient to cover the credit, some employers may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

     Once again, however, wages paid to owners of either S corporations or a regular corporation don’t count. That’s right; the ERC is not available for wages paid to a majority owner or such owner’s spouse—unless the majority owner has no living brother or sister (whether by whole or half blood), ancestor, or lineal descendant, in which case wages paid that owner or owner’s spouse will qualify for the ERC. 

More Hiring Help

     The WOTC mentioned earlier isn’t the only incentive available to help with the cost of hiring workers. While not directly tied to the targeted groups of the WOTC, employers can benefit from a helping hand, adapting their business premises to meet the needs of these new workers. But first, look at the following hiring incentive:

• Employers who hire veterans receive up to 50 percent of the veteran’s salary during the VA’s special employer initiative (SEI) program to provide training and experience to veterans, usually lasting up to six months. The credit was worth up to $5,000 per employee in 2020 and $7,000 per employee for each quarter of 2021.
       Covered are expenses incurred for the cost of instruction, necessary loss of production due to training status, and supplies and equipment necessary to complete training. And, of course, there is VA support during training and placement follow-up.
• The Disabled Access Credit provides a non-refundable tax credit of up to $5,000 for any small pressure cleaning business that incurs expenditures for the purpose of providing access to persons with disabilities. An eligible small business is one that earned $1 million or less or had no more than 30 full-time employees in the previous year. Even better, the credit may be claimed each and every year there are access-related expenditures. Form 8826, Disabled Access Credit, is used to claim the credit.
• The Architectural Barrier Removal Tax Deduction was created to encourage businesses of any size to remove architectural and transportation barriers affecting the mobility of people with disabilities and the elderly.
       A pressure washer may claim a deduction of up to $15,000 for qualified expenses for items that normally must be capitalized and depreciated simply by listing it as a separate expense on their federal annual income tax return.

     Businesses may use both the Architectural Barrier Removal Tax Deduction and the Disabled Tax Credit together in the same year so long as the expenses meet the requirements of both programs. To use both, the deduction is equal to the difference between the total expenditures and the amount of the tax credit claimed.

Happy Endings

     While the need for additional workers is expected to continue in the months ahead and most tax incentives for hiring those workers will continue, there is a definite “expiration date” on the ERC. Yes, the ERC will not provide a tax credit for workers beyond the December 31, 2021, deadline.

     The WOTC, of course, will not expire until 2025, and the tax credits and deduction for preparing workplaces, vehicles, and equipment to be more accessible for workers hired under the WOTC appear “evergreen” with no expiration date. Naturally, the complexity of these tax benefits will require assistance from the pressure cleaning operation’s state employment security agency (or other designated local agency in the case of the WOTC) or a qualified tax professional.