Question

Our company paid employees who were eligible for work opportunity credit of $30,000 last year. Of these wages, $26,000 is eligible for a tax credit of 40% of the wages and the remaining wages are eligible for a tax credit of 25% of the wages. The company's wages expense must be reduced by the amount of the credit. If the company's marginal tax rate is 35% how does this affect your company's taxes?

a.Increases taxes by $5,265
b.Reduces taxes by $5,265
c.Reduces taxes by $7.410
d.Increases taxes by $7.410

Answer 1

c. Reduces taxes by $7,410 because The work opportunity credit of $11,400 (40% of $26,000 + 25% of $4,000) reduces the company's taxes by $7,410 (35% of $11,400), resulting in a net tax reduction.

Step-by-step explanation:

The work opportunity credit is a tax incentive designed to encourage employers to hire individuals from certain targeted groups facing barriers to employment. In this case, the company paid eligible employees $30,000, with $26,000 eligible for a 40% tax credit and the remaining $4,000 eligible for a 25% tax credit.

For the $26,000 eligible for a 40% tax credit, the credit amount is $10,400 (40% of $26,000). For the remaining $4,000 eligible for a 25% tax credit, the credit amount is $1,000 (25% of $4,000). The total tax credit is $11,400 ($10,400 + $1,000).

Given that the company's marginal tax rate is 35%, the tax liability is reduced by $7,410 ($11,400 * 35%). Therefore, the correct answer is (c) Reduces taxes by $7,410. The work opportunity credit effectively lowers the company's tax burden, providing a financial incentive for hiring individuals from specified target groups.

So, the answer is c. Reduces taxes by $7,410