Most states in the US consider IT staffing companies to be full employers of people who don’t have a regular job. If you want to derive tax benefits by hiring them for your customers, your staffing company must have a state tax identification number and an EIN issued by the federal tax administration. IT staffing companies are obliged to withhold and remit payroll taxes.
Classifying Employees and Independent Contractors for Tax Credits
For getting benefits or credits, you first need to understand how to classify those people with whom you work. You may want to label employees as independent contractors and get some tax benefits, but for deriving overall benefit you must carefully examine whether they should be classified as W-2s instead of treating them as independent contractors. Intentionally making a wrong classification is illegal and makes it a criminal offense.
Your IT staffing company may be eligible for tax credits if your company qualifies for Work Opportunity Tax Credit (WOTC). WOTC is a federal tax credit for staffing companies that employ individuals who have faced difficulties in finding a regular job. Individuals in this category include: veterans, long terms unemployed individuals, and food stamp receivers. Tax credits for WOTC can be up to $9,600 for each qualified individual.
We recommend that you look for individuals who qualify in your staffing company. Chances are that you already have some and you are not claiming the tax credit for this. Use IRS form 8850 and ETA form 9061 when you hire. To be eligible, the forms must be submitted to the labor department within 28 days from the date of hire.
Step by Step Guide to WOTC
The first step:
Fill out IRS form 8850. On the first page, the applicant has to give details to the employer on or before the day a job offer is made. On page two the staffing company determines whether the applicant is an eligible WOTC target group individual.
The second step:
Complete the U. S. Department of Labor WOTC form 9061, or form 9062 in some states which is a conditional certification. This form will be used if a conditional certification is provided to the job applicant by a participating agency such as SWA.
The third step:
The Completed IRS and ETA Forms must be submitted to the State Workforce Agency. For faster processing, include all documentation together as a complete application to the SWA in your state not later than 28 days from the day the applicant starts to work in your staffing company.
States accept multiple methods for receiving the application – by mail, fax or email. In some states, you can submit the application via electronic submission.
The fourth step:
Once SWA approves the application, you can apply to the IRS for credit. The usual form for applying is 5884. However, for example, if the applicant is a veteran you will be required to use 5884-c.
Maintain Proper Documentation
As an employer, you will be expected to keep copies of IRS form 8850 and other transmittal letters and proof of mailing or other means that you used for submissions and certifications. Your staffing will be expected to keep all records for up to 3 years.