Tax Guides: Employer Incentives for Workforce Support and Benefits

To qualify as an eligible differential wage payment, the payment must meet both of the following requirements:

• The payment is made by an employer to a qualified employee for any period during which the employee is performing service in the uniformed services of the United States while on active duty for a period of more than 30 days, and
• The payment represents all or a portion of the wages the qualified employee would have received from the employer if the employee were performing services for the employer.

A qualified employee is a person who has been an employee for the 91-day period immediately preceding the period during which differential wage payments are made. Eligible differential wage payments are the sum of differential wage payments paid to an employee for the tax year, up to $20,000.

The Differential Wage Payment Credit is part of the General Business Credit under I.R.C. § 38. Accordingly, to claim this tax credit, employers must complete and attach the following tax forms to its federal tax return:

• I.R.S. Form 8932, Credit for Employer Differential Wage Payments, and
• I.R.S. Form 3800, General Business Tax Credit.

The Disabled Access Credit is available to eligible small businesses in the amount of 50% of “eligible access expenditures” that exceed $250 but do not exceed $10,250 for a taxable year. A business may take the credit each year that it makes an eligible access expenditure.

Only eligible small businesses that elect to claim the Disabled Access Credit are allowed to utilize this credit. In general, a business is considered an “eligible small business” for purposes of the Disabled Access Credit if the business has the following:

• $1 million or less in gross receipts for the preceding tax year.
• Fewer full-time employees during the preceding tax year.

For purposes of this credit, “eligible access expenditures” are amounts paid or incurred by an eligible small business for the purpose of enabling the business to comply with the applicable requirements of theAmericans with Disabilities Act of 1990 (ADA).

These include amounts paid or incurred to:

• Remove barriers that prevent a business from being accessible to, or usable by, individuals with disabilities (e.g., widening a doorway, installing a ramp).
• Provide qualified readers, taped texts, and other methods of making materials available to people with visual impairments (e.g., Braille, or audio).
• Provide qualified interpreters or other methods of making audio materials available to hearing-impaired individuals (e.g., sign language interpreters).
• Acquire or modify equipment or devices for individuals with disabilities.

Note: Expenditures must be reasonable and necessary to accomplish the above purposes. Expenses in connection with new construction are not eligible.

For an individual, a “disability” means:

• A physical or mental impairment that substantially limits one or more major life activities,
• A record of such an impairment, or
• Being regarded as having such an impairment.

This credit is part of the General Business Credit under I.R.C. § 38. Accordingly, to claim this tax credit, employers must complete and attach the following tax forms to its federal tax return:

• I.R.S. Form 8826, Disabled Access Credit, and
• I.R.S. Form 3800, General Business Tax Credit.

Notably, if a business meets the above requirements with respect to the removal of barriers and the amount of the business expenses paid or incurred exceeds the maximum amount allowed for the Disabled Access Credit,

it may be able to also claim the Architectural Barrier Removal Tax Deduction. In order to claim both the credit and deduction, the business must reduce the amount of the deduction by the amount of the credit claimed.

The Employer Credit for Paid Family and Medical Leave is an employer tax credit that is generally an applicable percentage of wages paid to qualifying employees while they are on family and medical leave. The applicable percentage of the tax credit is between 12.5% to 25% depending on the rate of payment for the leave under the employer’s policy (e.g., the applicable percentage is 12.5% if the employee is paid 50% of their salary while on leave).

An eligible employer is an employer with a written policy in place that provides:

• Paid family and medical leave of at least two weeks (annually) to all qualifying employees who work full time (prorated for employees who work part time).
• A rate of payment that is 50% or more of the wages normally paid to the qualifying employee.
• If the employer employs one or more qualifying employees who are not covered by the Family Medical Leave Act (FMLA), the policy must also include “non-inference” language.

Note: Any leave that is paid by a state or local government or required by state or local law is not taken into account for any purpose in determining the amount of paid family and medical leave provided by the employer.

A qualifying employee is generally an employee who:

• Has been employed by the employer for one year or more, and
• Who, for the preceding year, had compensation of not more than $81,000 (for compensation paid in 2022) and $90,000 (for compensation paid in 2023).

The Employer Credit for Paid Family and Medical Leave is part of the General Business Credit under I.R.C. § 38. Accordingly, to claim this tax credit, employers must complete and attach the following tax forms to its federal tax return:

• I.R.S. Form 8994, Employer Credit for Paid Family and Medical Leave, and
• I.R.S. Form 3800, General Business Tax Credit.

In general, employers of any size or type of business may be able to claim the Employer-Provided Childcare Credit if they have paid or incurred qualified childcare expenses during the tax year to provide childcare services to their employees.

• Costs associated with building or acquiring property used as the employer’s childcare facility, and
• Operating expenses made by the employer, such as, amounts paid to support childcare workers through training, or providing increased compensation to employees with higher levels of childcare training.

Employers can also claim a credit equal to 10% of the employer’s qualified childcare resource and referral expenditures (e.g., amounts paid to contract with a licensed childcare program (including home-based providers) to provide childcare for the employer’s employees).

This credit is capped at $150,000 per year. Notably, the employer may deduct eligible expenses that exceed the amount of the credit determined.

This credit is part of the General Business Credit under I.R.C. § 38. Accordingly, to claim this tax credit, employers must complete and attach the following tax forms to its federal tax return:

• I.R.S. Form 8882, Credit for Employer-Provided Childcare Facilities and Services, and
• I.R.S. Form 3800, General Business Tax Credit.

Employers should consider claiming this credit if they meet both of the following conditions:

• You are an employer who had employees receive tips from customers for providing, delivering, or serving food or beverages for consumption, and the tipping of employees by customers is customary, and
• During the tax year, you paid or incurred employer Social Security and Medicare taxes on those tips.

The amount of this credit is generally equal to the amount of employer Social Security and Medicare taxes paid or incurred by the employer on tips received by the employee. However, employers cannot claim the credit for taxes on any tips used to meet the federal minimum wage.

This credit is part of the General Business Credit under I.R.C. § 38. Accordingly, to claim this tax credit, employers must complete and attach the following tax forms to its federal tax return:

• I.R.S. Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, and
• I.R.S. Form 3800, General Business Tax Credit.

The Empowerment Zone Employment Credit is 20% of the employer’s qualified zone wages, up to $15,000, paid or incurred during the calendar year for services performed by an employee while the employee is a qualified zone employee.

There are no restrictions on the type or size of business in claiming this credit.

Subject to certain exceptions, a qualified zone employee is any employee (full-time or part-time) of the employer who:

• Performs substantially all of the services for that employer within an empowerment zone in the employer’s trade or business, and
• Has their principal residence within that empowerment zone while performing those services

This credit is part of the General Business Credit under I.R.C. § 38. Accordingly, to claim this tax credit, employers must complete and attach the following tax forms to its federal tax return:

• I.R.S. Form 8844, Empowerment Zone Employment Credit, and
• I.R.S. Form 3800, General Business Tax Credit.

Parts of the following urban areas are considered empowerment zones:

• Pulaski County, AR
• Tucson, AZ
• Fresno, CA
• Los Angeles, CA (city and county)
• Santa Ana, CA
• New Haven, CT
• Jacksonville, FL
• Miami/Dade County, FL
• Chicago, IL
• Gary/Hammond/East Chicago, IN
• Boston, MA
• Baltimore, MD
• Detroit, MI
• Minneapolis, MN
• St. Louis, MO/East St. Louis, IL
• Cumberland County, NJ
• New York, NY
• Syracuse, NY
• Yonkers, NY
• Cincinnati, OH
• Cleveland, OH
• Columbus, OH
• Oklahoma City, OK
• Philadelphia, PA/Camden, NJ
• Columbia/Sumter, SC
• Knoxville, TN
• El Paso, TX
• San Antonio, TX
• Norfolk/Portsmouth, VA
• Huntington, WV/Ironton, OH

Parts of the following rural areas are considered empowerment zones:

• Desert Communities, CA (part of Riverside County)
• Southwest Georgia United, GA (part of Crisp County and all of Dooly County)
• Southernmost Illinois Delta, IL (parts of Alexander and Johnson Counties and all of Pulaski County)
• Kentucky Highlands, KY (part of Wayne County and all of Clinton and Jackson Counties)
• Aroostook County, ME (part of Aroostook County)
• Mid-Delta, MS (parts of Bolivar, Holmes, Humphreys, Leflore, Sunflower, and Washington Counties)
• Griggs-Steele, ND (part of Griggs County and all of Steele County)
• Oglala Sioux Tribe, SD (parts of Jackson and Bennett Counties and all of Shannon County)
• Middle Rio Grande FUTURO Communities, TX (parts of Dimmit, Maverick, Uvalde, and Zavala Counties)
• Rio Grande Valley, TX (parts of Cameron, Hidalgo, Starr, and Willacy Counties)

In general, the Military Spouse Participation Credit allows eligible employers to claim a $200 credit for each military spouse that participates in an eligible defined contribution plan of the employer, plus up to $300 of the amount of the employer’s contributions (not including an elective deferral) to the plan during the tax year on behalf of the military spouse.

Limitation

The credit is limited to three successive tax years of the employer, beginning with the first tax year during which the employee began participating in the plan after it was adopted as, or amended to be, an eligible defined contribution plan.

Eligible Small Employer

To qualify as an eligible small employer, an employer must employ 100 or fewer employees during the preceding tax year for which the credit is claimed and who were paid at least $5,000 of compensation from the small employer during that tax year.

Eligible Defined Contribution Plan

An eligible defined contribution plan is generally any defined contribution plan (as defined in I.R.C. § 414(i)) of the eligible small employer under which military spouses employed by the employer are eligible to participate in the plan within two months of their hiring date, who are immediately eligible to receive matching or nonelective employer contributions that they would otherwise not qualify to receive for at least two years of employment, and must be immediately 100% vested in the defined contribution plan.

A “military spouse” is defined as an employee of the eligible small employer who is not highly compensated and, as of the first date the employee is employed or rehired by the employer is married to a member of the U.S. uniformed armed services serving on active duty.

The Military Spouse Participation Credit may be claimed only for tax years of an eligible small employer beginning after December 29, 2022.

This credit is part of the General Business Credit under I.R.C. § 38. Accordingly, to claim this tax credit, employers must complete and attach the following tax forms to its federal tax return:

• I.R.S. Form 8881, Credit for Small Employer Pension Plan Startup Costs, Auto-Enrollment, and Military Spouse Participation, and
• I.R.S. Form 3800, General Business Tax Credit

The Small Business Health Care Tax Credit is a tax credit of the premiums an eligible small employer paid for health insurance coverage under a qualifying health plan. An employer is considered an “eligible small employer” if the following requirements are met:

• The employer paid premiums for employee health insurance coverage that it purchased through a Small Business Health Options Program (SHOP) Marketplace.
• The employer had fewer than 25 full-time equivalent employees (FTE) for the tax year.
• For 2023, the employer paid average annual wages for the tax year of less than $62,000 per FTE.
• All FTEs are offered health insurance coverage through a Small Business Health Options Program (SHOP) Marketplace.

Credit Period: This credit is only available to eligible small employers for two consecutive years beginning with the first year the employer claims the credit. The amount of the credit the small employer receives works on a sliding scale. The smaller the employer, the bigger the credit.

The maximum credit is:

• 50% of premiums paid for small business employers and
• 35% of premiums paid for small tax-exempt employers.

The IRS Taxpayer Advocate Service provides a Small Business Health Care Tax Credit Estimator to help employers find out if they are eligible and how much their credit may be.

This credit is part of the General Business Credit under I.R.C. § 38. Accordingly, to claim this tax credit, employers must complete and attach the following tax forms to its federal tax return:

• I.R.S. Form 8941, Credit for Small Employer Health Insurance Premiums, and
• I.R.S. Form 3800, General Business Tax Credit.

Only “eligible employers” may claim the Small Employer Pension Plan Startup Cost Tax Credit. An eligible employee must satisfy the following requirements:

The employer had 100 or fewer employees who were paid at least $5,000 in compensation for the preceding year;

The employer had at least one participant who was a non-highly compensated employee† (NHCE); and

• In the previous three tax years before the first year the employer is eligible for this credit, the employer’s employees were not substantially the same employees who received contributions or accrued benefits in another plan sponsored by the employee.

The credit is 50% of the eligible employer’s eligible startup costs, up to the greater of:

• $500; or the lesser of:
  • $250 multiplied by the number of NHCEs who are eligible to participate in the plan, or
  • $5,000

Eligible startup costs include the ordinary and necessary costs to set up and administer the plan and to educate employees about the plan.

This credit is part of the General Business Credit under I.R.C. § 38. Accordingly, to claim this tax credit, employers must complete and attach the following tax forms to its federal tax return:

• I.R.S. Form 8881, Credit for Small Employer Pension Plan Startup Costs, Auto-Enrollment, and Military Spouse Participation.
• I.R.S. Form 3800, General Business Tax Credit.

The Small Employer Auto-Enrollment Credit is a $500 tax credit for the first tax year that an eligible employer first includes an eligible automatic contribution arrangement in a qualified employer plan. An eligible employer may claim this credit for each of the following two tax years, provided they maintain the automatic contribution arrangement during the applicable tax year.

To qualify as an eligible employer, employers must have no more than 100 employees during the tax year preceding the first credit year who received at least $5,000 of compensation during that tax year.

This credit is part of the General Business Credit under I.R.C. § 38. Accordingly, to claim this tax credit, employers must complete and attach the following tax forms to its federal tax return:

• I.R.S. Form 8881, Credit for Small Employer Pension Plan Startup Costs, Auto-Enrollment, and Military Spouse Participation.
• I.R.S. Form 3800, General Business Tax Credit.

The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025. This credit is generally equal to 40% of up to $6,000 (i.e., a maximum tax credit of $2,400 per employee) of wages paid to or incurred on behalf of, an individual who:

• Is in their first year of employment (and not a re-hire);
• Is certified as being a member of a targeted group; and
• Performs at least 400 hours of services for that employer (25% rate available if employee performs at least 120 hours of service but not the full 400 hours).

An employee is a member of a targeted group if he or she began working for the employer before 2026, and is a:

• Long-term family assistance recipient,
• Qualified recipient of Temporary Assistance for Needy Families (TANF),
• Qualified veteran,
• Qualified ex-felon,
• Designated community resident,
• Vocational rehabilitation referral,
• Summer youth employee,
• Supplemental Nutrition Assistance Program (SNAP) benefits recipient,
• SSI recipient, or
• Qualified long-term unemployment recipient.

1. The employer must pre-screen and obtain certification that the employee is member of one of the abovementioned targeted groups to claim the credit. The certification is generally determined by a State Workforce Agency (SWA).

Pre-Screen & Certification

On or before the day that a job offer is made, a prescreening notice (I.R.S. Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit) must be completed by both the job applicant and the employer. Before the prescreening form can be submitted, the following four dates must be filled out—the date the job applicant:

• Gave information,
• Offered job,
• Hired, and
• Started job.

Tax Form Submission

The employer must submit I.R.S. Form 8850 to its Designated Local Agency or SWA no later than 28 calendar days after the applicant started the job.

2. Once the required certification is received, to claim the credit, the employer must fill out the appropriate IRS tax form(s).

Taxable Employers

The WOTC is a General Business Tax Credit under I.R.C. § 38. Accordingly, taxable employers must claim this credit on itsI.R.S. Form 3800, General Business Tax Credit andI.R.S. Form 5884, Work Opportunity Credit and file each form with its federal tax return.

Tax-Exempt Employers

Qualified tax-exempt organizations may claim credit for qualified veterans who begin work for the organization before 2026. After the required certification is received, tax-exempt employers claim the credit against the employer’s share of Social Security tax by separately filingI.R.S. Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.

The IRS allows businesses to elect to take a deduction of up to $15,000 per year for “qualified architectural and transportation barrier removal expenses.” Expenditures to make a facility or public transportation vehicle owned or leased in connection with a trade or business more accessible to, and usable by, individuals who are handicapped or elderly are eligible for the deduction (e.g., ramps, elevators, and signage).

The definition of a “handicapped individual” is similar to the Americans with Disability Act definition of an “individual with a disability.”

Businesses must elect to claim this deduction by listing it as a separate expense on its income tax return for the tax year the expenses were paid or incurred. Businesses must also maintain adequate records to support its deduction.

Notably, if a business meets the requirements of the Architectural Barrier Removal Tax Deduction and is an eligible small business, it may also be eligible to claim the Disabled Access Credit.

In order to claim both the credit and deduction, the business must reduce the amount of the deduction by the amount of the credit claimed.

Employers may be eligible for a deduction with respect to contributions made to certain employee related plans. These rules are detailed and complex and any employer seeking to take one or all of these deductions should consult a professional tax advisor.

• I.R.C. § 404: Employers may be eligible for a deduction for its contributions to an employee’s trust or annuity plan and compensation under a deferred-payment plan.
• I.R.C. § 419: Employers may be eligible for a deduction for contributions paid or accrued to a welfare benefit fund (e.g., life, health, disability, long-term care, and post-retirement medical).
• I.R.C. § 194A: Employers may be eligible for a deduction for contributions to certain employer liability trusts.

Eligible businesses would claim these deductions on their federal tax return.

Businesses may be allowed a deduction for trade or business expenses under I.R.C. § 162. The general rule is that businesses may deduct trade or business expenses that are ordinary and necessary and directly connected to the taxpayer’s trade or business.

Examples of these types of expenses include:

• Management expenses,
• Commissions,
• Labor,
• Supplies,
• Incidental repairs,
• Operating expenses of automobiles used in the trade or business,
• Business travel,
• Advertising and other selling expenses,
• Business insurance premiums against fire, storm, theft, accident, or other similar losses, and
• Rental for the use of business property.

Ordinary and Necessary Expenses

Deductible “ordinary” expenses generally means ones that are “customary or usual of common or frequent occurrence of the trade or business” and “necessary” expenses generally are defined as expenses that are “appropriate and helpful for the development of the business.”

Businesses may deduct its eligible trade or business expenses on its federal tax return.