State tax credits provide valuable incentives to businesses
January 10, 2014
By Stacey May, Director of Tax Credits
While many businesses know about the Work Opportunity Tax Credit (WOTC) and other federal incentives, in many instances employment related credits are available on a state by state basis that can potentially save thousands in taxes. HK Payroll Services, Inc. (HKP) research team combed through hundreds of state incentives to locate those that will benefit your business without jumping through too many hoops. Each state’s programs vary widely, and the most important thing to remember before inquiring about these credits is that your business must be paying taxes in that state to take full advantage. While the credits listed below are certainly not all inclusive, they are pertinent examples of potential tax savings for your business.
In Arizona, an employer that hires an individual on welfare may credit a portion of wages paid against the employer’s Arizona corporate income tax liability during the first three years of employment. In the first year or part-year of an employee’s employment, an employer may claim a credit for 25% of the taxable wages paid, but no more than $500. In the second year, the credit is for one-third of the wages, but no more than $1,000. In the third year, the credit is for 50% of the wages, but no more than $1,500. The employee must be an Arizona resident and receiving temporary state aid for a dependent child or children through the Arizona Department of Economic Security. Additionally, the employee’s job must be full-time, health insurance must be provided to the employee if it is available to employees who are not receiving public aid, the employee must receive either the minimum wage or pay that is comparable to other employees doing the same work, the employee must have been on the job for at least 90 days during the first year of employment, the employee must not have been employed by the employer within the 12-month period before the employee’s hiring date, and no other Arizona income tax credit can be claimed for the wages. To be eligible for the credit, the employer must show that, in the year of the tax credit, the average number of employees from needy families in its workforce increased from the average number in the preceding year.
In Illinois, employment related credits exist for hiring veterans (link to veterans article) and ex-offenders. A credit of up to $600 may be taken against Illinois corporate income tax for wages paid to qualified ex-offenders. A qualified ex-offender is any person who (1) is an eligible offender as defined under Illinois law; (2) was sentenced to a period of incarceration in an Illinois adult correctional center; and (3) was hired by the taxpayer within one year after being released from an Illinois correctional center. Qualified wages (1) includes only wages that are subject to federal unemployment tax; (2) does not include any amounts paid or incurred by an employer for any period to any qualified ex-offender for whom the employer receives federally funded payments for on-the-job training of that qualified ex-offender for that period; and; (3) includes only wages attributable to service rendered during the one-year period beginning with the day the qualified ex-offender begins work for the employer.
In North Dakota, taxpayers are entitled to a credit for a portion of the wages paid to a developmentally disabled or chronically mentally ill employee. The credit is equal to 5% of the wages paid during the first 12 months of employment, up to a maximum of $6,000 for each qualified employee. The total credit may not exceed 50% of the taxpayer’s income tax liability.
In Arkansas, taxpayers may claim a credit against state corporate income tax for creating jobs. The amount of the credit depends on the location of the business (county) and payroll requirements ($50,000 – $125,000 minimum), but can offset up to 50% of the taxpayer’s liability. To qualify for the credit, the proposed average hourly wage must be equal to or greater than the lowest county average hourly wage based on the most recent calendar year data available. A financial incentive agreement with the state is required. The date of the agreement is the date used to determine when the payroll threshold must be met. Only employees hired after the date of the agreement are eligible for the credit.
In California, employers operating in enterprise zones are allowed a credit based on a percentage of qualified wages paid or incurred during the taxable year with respect to qualified employees. The hiring credit is equal to 50% of qualified wages paid or incurred during the employee’s first year of employment for the enterprise zone employer, and 40%, 30%, 20%, and 10% of qualified wages paid or incurred during the second, third, fourth, and fifth years, respectively. A taxpayer must obtain certification that an individual meets the requirements for a “qualified employee” from the Employment Development Department (EDD), GAIN, the local county or city JTPA administrative entity, or the local government agency administering the enterprise zone program. The Department may charge a fee of up to $80 per application submitted for the issuance of a hiring credit voucher certificate.
In New York, a corporate franchise income tax credit of up to $2,100 per employee is allowed for employing qualified disabled persons. The credit is 35% of the first $6,000 in wages for the qualified employee’s first year of employment. To be a “qualified employee”, an individual must meet three requirements: (1) the individual must qualify as a “vocational rehabilitation referral” for purposes of the federal WOTC; (2) the employee must work on a full-time basis for at least 180 days or 400 hours; and (3) the individual must be certified by the Education Department: (a) as a person with a disability that constitutes or results in a substantial handicap to employment, and (b) as having completed or as receiving services under an approved individualized written rehabilitation plan. Where an employee’s wages also constitute qualified first-year wages for purposes of the federal WOTC for vocational rehabilitation referrals, the amount of the credit is 35% of the first $6,000 in wages for the qualified employee’s second year. This has the effect of requiring that the employee be employed for two years.
There are also valuable credits available in Connecticut, North Carolina, Georgia, Louisiana, Massachusetts, Mississippi, Utah, and many other states. Laws are constantly changing and new credits are created all the time. HKP stays on top of the latest developments to make sure your business gets all of the tax savings it deserves.