The IRS has encouraged small business owners to check out the expanded credit for hiring veterans and the credit for employer-provided health care coverage as these credits can provide significant tax benefits during 2012. The IRS has also highlighted the Voluntary Classification Settlement Program (VCSP), which is available to eligible small employers who have miss-classified their workers as independent contractors and agree to reclassify their workers as employees in the future.

Credit for Hiring Veterans

A law change enacted late in 2011 provides an expanded Work Opportunity Tax Credit (WOTC) to employers that hire eligible unemployed veterans. The credit can be as high as $9,600 per veteran for for-profit employers or up to $6,240 for tax-exempt organizations. The amount of the credit depends on a number of factors, including the length of the veteran’s unemployment before hire, hours the veteran works and the amount of first-year wages paid. Employers who hire veterans with service-related disabilities may be eligible for the maximum credit. Employees must be certified with the appropriate state agency for businesses to claim the credit. Businesses claim the credit on their income tax return using Form 5884 and Form 3800. A separate claim procedure using Form 5884-C applies to eligible tax-exempt organizations.

Employee Health Care Coverage Credit

Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for the small business health care tax credit. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. Eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014. Targeted to small employers that primarily employ low- and moderate-income workers, the maximum credit, in tax-years 2010 through 2013, is 35 percent of premiums paid by small businesses and 25 percent of premiums paid by tax-exempt organizations, increasing to 50 percent and 35 percent, respectively, in 2014. Small businesses claim the credit on their income tax return using Form 8941 and Form 3800. Tax-exempt organizations also use Form 8941 and then claim the credit on Form 990-T.

Payroll Tax Relief

Many businesses can resolve worker classification issues at a low cost by voluntarily reclassifying their workers. By prospectively reclassifying workers, making a minimal payment and meeting a few other requirements, eligible businesses can achieve greater certainty for themselves, their workers and the government. Approval has been given to 540 employers to participate in the new IRS Voluntary Classification Settlement Program (VCSP) since it was launched in September 2011. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently treat their workers or a class or group of workers as nonemployees or independent contractors, and that want to correctly treat these workers as employees in the future. To be eligible, an employer must:

• Consistently have treated the workers in the past as nonemployees,
• Have filed all required Forms 1099 for the workers for the previous three years, and
• Not currently be under audit by the IRS or the Department of Labor or a state agency concerning the classification of these workers.

Interested employers can apply for the program by filing Form 8952. Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. Moreover, employers will not be audited on payroll taxes related to these workers for prior years.

IR-2012-56, May 23, 2012