Common Payroll Tax Credit Opportunities & How to Claim Them
Payroll isn’t only an expense—it can also be a source of savings if you know where to look. Many small businesses overlook valuable tax credits that directly reduce payroll costs, simply because they’re not aware they exist. Understanding and leveraging these incentives can create meaningful financial relief, particularly for growing employers.
One of the most well-known programs is the Work Opportunity Tax Credit (WOTC), designed to encourage hiring individuals who face barriers to employment, such as veterans, long-term unemployed workers, and recipients of government assistance. The credit can be worth up to $9,600 per employee, depending on wages and hours worked. To qualify, employers must complete IRS Form 8850 and submit it to their state workforce agency within 28 days of the employee’s start date.
The FICA Tip Credit offers similar value for restaurants and hospitality businesses, allowing employers to claim a portion of the Social Security and Medicare taxes paid on reported tips. This credit helps offset the extra payroll burden on industries where tips make up a large part of employee income.
Health benefits can also bring tax advantages. The Small Business Health Care Tax Credit allows qualifying companies to recoup up to 50% of the premiums they pay toward employee health coverage. To qualify, you must have fewer than 25 full-time employees, pay average wages under $56,000, and cover at least half of employee premiums.
Another often-overlooked opportunity lies in paid leave programs. Under Section 45S of the Internal Revenue Code, employers who voluntarily provide paid family and medical leave may claim a credit worth up to 25% of the wages paid during that leave. While not permanent, it’s a powerful incentive for small employers to enhance benefits without sacrificing profitability.
For startups and innovative firms, the Research & Development (R&D) Payroll Tax Offset can be a game changer. Qualifying companies can apply up to $250,000 of their R&D credit against payroll taxes—freeing up working capital that would otherwise go to the IRS.
While each credit has its own eligibility requirements, the process of claiming them is fairly consistent: accurate payroll records, timely documentation, and coordination with your CPA or payroll provider. Employers must keep detailed wage data, hours worked, and proof of eligibility for every claim. Most credits are claimed through quarterly payroll filings (Form 941) or annual business tax returns.
Ultimately, these programs exist to reward employers who invest in people—by hiring inclusively, offering benefits, and fostering growth. Taking time to review credit opportunities annually ensures your business isn’t missing out on money you’ve already earned.