November 6, 2019
By Rhonda Abrams
Special to USA TODAY
In my USA TODAY column in November 2009 – 10 years ago – I proposed a new idea: a tax credit for small businesses who hire their very first employee. Throughout the last decade, I’ve repeatedly advocated this “first employee tax credit,” and now Sen. Ron Wyden, D-Ore., has introduced such legislation.
“What this bill is all about is making it possible for small businesses to get out of the gate in a realistic way and grow,” said Wyden. “Some of the biggest businesses in this country started in garages, dorm rooms, coffee shops.”
“I’ve been all over the state in town-hall meetings … and an informal group of women entrepreneurs starting talking to me,” explained the senator. “This bill grew out of their suggestions. … The heart of the bill is to create that incentive to hire the first employee and to create incentives for capital investment (in small businesses) for others.”
Wyden’s legislation — the “Progress Act” — creates two new tax benefits to help small businesses grow. These provide:
- A first employee tax credit equal to 25% of W-2 wages, up to $10,000 a year, with a $40,000 lifetime limit.
- A small-business investor tax credit up to 50% of a qualified debt or equity investment, up to $10,000 a year, with a lifetime limit of $50,000.
Both incentives are limited to businesses owned by a U.S.individual earning $100,000 or less ($200,000 or less for joint filers).
With this bill, Wyden targets jobs rather than the usual tax incentives for acquiring hard assets, such as property, plant, equipment. “If you look at the history of the tax-writing committee,” said Wyden, “there’s loads of incentives for machines and equipment. Where’s the incentive for people?”
While any small business could gain from the incentives, women entrepreneurs in particular may benefit, because:
- Women are more likely to be in industries not receiving tax incentives, such as service businesses.
- Women-owned businesses tend to generate less income; most tax breaks are aimed at larger businesses.
“Most net new jobs come from businesses that are less than five years old with fewer than five employees,” said Frank Knapp, co-chair of Business for Responsible Tax Reform. “An entrepreneur who doesn’t have employees ought to be encouraged to hire their first employee – that’s the way to grow your business.”
“Small businesses got short shrift in the 2017 tax law,” said Knapp, referring to the temporary and limited 20% added deduction for pass-through income. “It didn’t compare to the 40% permanent tax rate cut for large corporations.”
Indeed, an analysis of the 2017 tax law shows about half the benefits of the “small business” deduction for pass-through income actually went to individuals earning $1 million or more.
Wyden’s legislation would directly help the smallest of businesses to grow.
Hiring your first employee is a huge hurdle. In addition to wages, you might need extra space and equipment. There’s paperwork – filing W2s, payroll taxes. There’s also the emotional hurdle of going from being on your own to having someone you’re in charge of.
It’s why I waited so long – too long – before I hired my first employee in my business. But here’s the truth: You cannot grow your business alone. Hiring employees changed my life. The experience led me to write a book, “Hire Your First Employee,” to encourage other sole proprietors to take the leap.
Currently, there are 25 million U.S. non-employer businesses, generating total revenues of over $1.2 trillion. These businesses include self-employed consultants, attorneys, engineers, hairdressers, plumbers, graphic designers, even dentists and doctors. While the vast majority may never have the financial ability or desire to hire, many others could and should grow. A tax credit might be just the incentive they need.
“The moment you get that first hire, the curtains begin to part,” said Wyden.
“I am thrilled that Sen. Wyden has put together this package of the first employee tax credit and the provision to allow everyday people to invest in small businesses,” said Knapp.
What’s the future of these tax credits? “We’ve been talking to Republican (Senate) offices,” said Wyden. “The conversations are encouraging. I’m going to make this bill a special priority of mine.” He encouraged others to keep the conversation going. “Ask everyone who is running for office in 2020, ‘What are you going to do for small business?’ Here’s a piece of legislation – what are you going to do?”
Rhonda Abrams is the author of “Successful Business Plan: Secrets & Strategies,” the best-selling business plan guide in the US, just released in its seventh edition.