By employing those people with the highest barriers to employment, many of your social enterprise employees are likely returning to the workforce after a considerable absence. This transition back into the workforce means that individuals are earning more of their income through paid employment, which in turn has implications when it comes to income taxes and filing tax returns.
While the idea of filing taxes may conjure up images of owing money to the government, for many low-income people the opposite is true: filing taxes may actually mean the government owes them money. However, REDF has found that, for a variety of reasons, many social enterprise employees are not taking advantage of this and are forgoing available tax refunds.
This learning guide, the first in a series on income taxes and social enterprise employees, will explore why this is happening and why your social enterprise should care about encouraging your employees (and graduates) to file their taxes. In subsequent learning guides, we will provide you with additional resources to support your social enterprise employees to file their taxes, and increase dollars into the pockets of your social enterprise employees.
There are a number of common misconceptions around filing taxes among social enterprise employees. Many believe that they do not need to file their taxes because they do not earn enough and therefore won’t owe any. Similarly, people may believe that there’s no point in filing their taxes if they don’t owe any. But, in reality, neither may be true.
If someone earns enough to owe taxes, then they need to file and pay accordingly in order to avoid penalties for not doing so. However, the converse is also true: if someone doesn’t earn enough to owe any taxes, they should still file them in order to take advantage of available tax credits (which we explore below). So while it may be true that low-income earners aren’t required to file taxes, that doesn’t mean there’s no reason for them to do so.
There are also common misconceptions about the cost of filing taxes. There are undoubtedly unscrupulous actors out there that aim to take advantage of people by charging up-front and unnecessary fees. However, there are a number of resources available to help low-income earners file their taxes at no cost. Additionally, these resources will be more familiar with taking advantage of various tax credits for which low-income earners might qualify.
One of the primary reasons it is important for your social enterprise employees to file their taxes is so they can take advantage of available tax credits. Simply put, tax credits are a reduction in the amount of tax liability that someone owes. For example, a tax credit of $1000 would reduce someone’s tax liability from $1,500 to $500.
Refundable tax credits, on the other hand, are a particular type of tax credit that not only offsets tax liabilities, but also refunds the difference to the filer. For example, let’s say a person owes $1,000 in taxes. A regular (“nonrefundable”) tax credit of $1,500 would reduce the amount owed to $0, even though the tax credit is greater than the tax liability. A refundable tax credit of $1,500, on the other hand, would result in that person receiving a $500 refund (the difference between the tax credit and the tax liability).
There are a number of refundable tax credits available, many of which benefit low-income workers by design.
Earned Income Tax Credit (EITC)
In order to encourage paid employment and reduce the tax burden on low-to-moderate income individuals and families, the federal government enacted the Earned Income Tax Credit (EITC). The EITC supplements the wages of qualifying workers to increase their overall earning power and to reduce dependency on public benefits. EITC benefits 42% of American workers that make less than $15 an hour. In 2017, the average amount received by workers was $2,470. In addition to the federal EITC, 29 states have their own EITCs that may expand who qualifies and supplement the refund amount further.
Child Tax Credit (CTC)
The Child Tax Credit is a credit to help families offset some of the costs of raising children. The tax credit is $2,000 per child under the age of 17. Low-income families can receive a refund equal to 15% of their earnings over $2,500, up to $1,400 per child.
Healthcare Premium Tax Credit (PTC)
The Healthcare Premium Tax Credit is a refundable credit to help individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. To be eligible, household income must be at least 100%, but no more than 400%, of the federal poverty line for the family size. The amount of the premium tax credit is based on a sliding scale, with greater credit amounts available to those with lower incomes.
These are just three of many tax credits available. The point of this learning guide is not to replace a tax expert in determining which tax credits are right for certain people. What we hope we are getting across is the value of pursuing tax credits for the people that your social enterprise employs and, in turn, the important role your social enterprise can play in ensuring that they are not leaving their earned money on the table.
If you could give your employees a significant end of year bonus, at no cost to you, wouldn’t you? For many low-income tax filers, refund tax credits can be essentially that. Research indicates that families mostly use the money received from tax credits to pay for necessities, repair homes, maintain vehicles that are needed to commute to work, and in some cases, obtain additional education or training to boost their employability and earning power.
As we approach the beginning of tax season, we want to provide your social enterprise with the resources to prepare your employees to file taxes. In upcoming learning guides will learn how to connect your employees to tax preparation resources, more information about the Earned Income Tax Credits, and share a Tool to help you educate your employees on taxes.