Tax credit
A tax credit is one of the best ways businesses can save money during tax time.
- Read time3 min read
- Filed underTaxes · 64 terms
- Written byHomebase Team
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What is a tax credit?
A tax credit is one of the best ways businesses can save money during tax time.
Instead of just lowering your taxable income like a deduction, a tax credit directly reduces the taxes you owe—dollar for dollar! If your business qualifies, tax credits can cut thousands off your tax bill, freeing up cash for growth, hiring, and everyday operations.
From payroll and hiring incentives to sustainability initiatives, plenty of tax credits are designed to help businesses thrive. The key is knowing which ones apply to you and how to claim them properly.
Why do tax credits matter?
Every dollar counts when running a business, and tax credits help you:
- Save money: Reduce your tax bill instead of just lowering your taxable income.
- Hire and retain employees: Some credits reward businesses for hiring certain groups.
- Offer better benefits: Health insurance and paid family leave credits can make benefits more affordable.
- Invest in innovation and sustainability: If your business is making improvements, you might be eligible for credits.
Common business tax credits employers should know
The benefits from tax credits can be immense, but without knowing how to handle small business taxes, it can be hard to know where to start. Here are some of the most popular tax credits that could help your business:
1. Work opportunity tax credit (WOTC)
- Encourages businesses to hire individuals from certain targeted groups, like veterans and long-term unemployed individuals.
- Businesses can save up to $9,600 per eligible employee in tax credits.
2. Small business health care tax credit
- Helps small businesses afford health insurance for employees.
- Available for companies with fewer than 25 full-time employees who contribute at least 50% toward employee premiums.
3. Employee retention credit (ERC)
- Created to help businesses keep employees on payroll during tough economic times.
- Offers a percentage of wages back as a credit, helping employers lower costs.
4. Research & development (R&D) Tax Credit
- Encourages businesses to invest in new technology, product development, or research.
- Can be applied to offset payroll taxes for eligible small businesses.
5. Paid family and medical leave credit
- Employers who offer paid leave to employees under the Family and Medical Leave Act (FMLA) may qualify.
- Covers wages paid for up to 12 weeks of leave per employee.
6. Energy efficiency and sustainability credits
- Businesses making green upgrades—like solar panels or electric vehicles—may qualify for tax credits.
How to claim tax credits for your business
Taking advantage of tax credits isn’t as complicated as it sounds. Here’s how to do it:
- Check your eligibility: Look into federal, state, and local tax credits to see which apply to your business.
- Keep detailed records: Save documentation on hiring practices, payroll expenses, and business improvements.
- File the proper forms: Many credits require IRS forms, such as Form 5884 for WOTC or Form 8941 for the Small Business Health Care Tax Credit.
- Stay updated: Tax laws change, so watch for new credits that could benefit your business.
Keeping track of tax credits and double-checking eligibility criteria can already be time-consuming without adding the usual tasks of filing taxes on top. That’s why so many small businesses use payroll software to automate the basics, so that you can dedicate time to finding the tax savings that fit your business.
Tax credits vs. tax deductions: What’s the difference?
Many business owners mix up tax credits and tax deductions, but they work differently:
- Tax credits lower the amount of taxes you owe. (Example: A $5,000 tax credit reduces your tax bill by $5,000.)
- Tax deductions lower your taxable income, reducing your tax bill based on your tax rate. (Example: A $5,000 deduction reduces taxable income, meaning you save based on your tax bracket.)
While both help businesses save money, tax credits have a bigger impact on reducing your final tax bill.
How Homebase can help with payroll and tax compliance
Keeping up with payroll taxes, deductions, and tax credits can feel overwhelming, but Homebase payroll makes it simple.
With Homebase, you can:
- Automatically calculate payroll taxes so you don’t miss anything
- Keep records organized to make claiming tax credits easy
- Ensure compliance with IRS regulations
- Save time and reduce stress by managing payroll and tax credits in one place
Sign up now to take taxes off your plate so that you can reinvest your time into your business.
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ACH credit
An ACH credit is a type of electronic payment made through the Automated Clearing House (ACH) network, where funds are "pushed" from one bank account to another.
PayrollAdvice of credit
An advice of credit is a formal notice issued by a bank, payroll provider, or payment processor to confirm that funds have been deposited into a recipient’s account.
PayrollTip credit
A tip credit is a legal provision that allows employers in specific industries, such as restaurants and hospitality, to count a portion of employees' tips toward meeting the federal or state minimum wage requirements.
PayrollAnnual tax
Annual tax refers to the total amount of taxes an employer is required to pay every year, based on a combination of business income, employee wages, and other applicable factors.
TaxesConsumption tax
A consumption tax is a tax on the purchase of goods and services.
TaxesDeferred income tax
Deferred income tax refers to the amount of taxes a business owes or will recover in the future due to temporary differences between the way income and expenses are reported on financial statements.
Taxes
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