The Ins-and-Outs of Employment Tax Credits for Manufacturers

Through employment tax credits, manufacturers can offset a portion of their income tax liabilities. Credits are available to manufacturing businesses that invest in workforce development, equipment upgrades, research and development, and more.

Several employment tax credits are available to employers in the manufacturing industry, including the Federal Empowerment Zone (FEZ) and the Work Opportunity Tax Credit (WOTC). The following discusses what manufacturing leaders stand to gain from qualifying for the credits.

Federal Empowerment Zone (FEZ)

Under the FEZ program, manufacturers can utilize their company’s location for profit when they’re located in a designated Federal Empowerment Zone. The IRS allows a 20% income tax credit on the first $15,000 in wages paid annually to employees in Federal Empowerment Zones, worth up to $3,000 per employee. Those that qualify, meaning a business has location(s) with employees located within the boundary of a designated Federal Empowerment Zone, can find tax savings that boost their profitability.

Businesses can claim this credit for full- or part-time employees with a minimum employment period of 90 days (unless an employee is terminated for misconduct), and the credit can be carried back one year and forward 20. All for-profit companies are eligible for the program, and owners of pass-through entities can also claim the credit. Established by Congress in 1993, it doesn’t require an application or certification and can be combined with other federal tax credits. This credit should also be considered when preparing tax provisions for estimated payments.

Work Opportunity Tax Credit (WOTC)

Further, the WOTC is a federal income tax credit available to employers who hire individuals from eligible target groups facing significant employment barriers (for example, veterans, individuals from economically disadvantaged backgrounds or those who have been unemployed for an extended period). Utilizing WOTC, employers can lower their effective tax rate. The credit also complements opportunities within other workforce programs that incentivize workplace diversity and facilitate access to jobs.

The WOTC offers up to $9,600 federal income tax credit per employee hired and is based on hours worked and wages paid to certified employees, with no limit on the number of eligible hires across all industries. This program does require a process to screen, track and calculate credits for each eligible employee, and only new hires qualify, not rehires. Certification by a State Workforce Agency (SWA) is required before claiming the credit, which can be carried back one year or forward up to 20.

Employees must work a minimum of 120 hours in their first year, with credits starting at 25% of gross wages. At 400 cumulative hours, the credit increases to 40%. WOTC is a two-year credit unless the maximum credit value based on the certified category has been achieved in the first year of employment. Credits claimed on Form 5884 for corporate tax returns correspond to the year of WOTC certificate issuance.

Employment tax credits in manufacturing

Employment tax credits in manufacturing are designed to incentivize businesses to expand and upskill their workforce, increase research and development activities, and enhance competitiveness. While the benefits of these tax credits are substantial, ensuring compliance with applicable regulations is just as critical. It is important for manufacturing companies to maintain proper documentation to claim these credits and avoid potential penalties.

Knowing how to qualify and apply for these opportunities might not be something every manufacturing leader is aware of. If you’re interested in learning more about eligibility and employment tax credits, please talk to our team.