AndreTaxCo, PLLC

"Active Duty Employees of Uniformed Services" Credit

​

The Employer Differential Wage Payments Credit under IRC §45P (enacted by §111 of the HEART Act, Pub. L. 110-245) provides eligible small business employers a credit equal to 20% of differential wage payments made to qualified employees during the tax year, up to $20,000 per employee (maximum credit $4,000 per employee). For example, if you pay $15,000 in differential wages to a qualified employee, your credit is $3,000.

​

This provision incentivizes small businesses to maintain wage support for employees serving on active duty in the U.S. uniformed services for more than 30 days. The §45P credit is part of the general business credit under IRC §38(b) and is subject to carryback and carryforward rules under IRC §39.​

​

Below outlines a summary of the eligible wage expenses and criteria for claiming the credit.

​

Eligible Differential Wage Payments

Eligible differential wage payments are the total differential wage payments paid to the employee during the tax year, capped at $20,000 per employee. The definition of “differential wage payment” follows IRC §3401(h) and related guidance in IRS Notice 2010-15.

 

Under IRC §3401(h), a “differential wage payment” means any payment that:

• Is made by an employer to an individual during a period of active duty in the uniformed services for more than 30 days (as defined in 38 U.S.C. §4303); and

• Represents all or part of the wages the individual would have earned if working for the employer.

​​

Uniformed Services

38 U.S.C. §4303(17) defines "uniformed services" to include

• the Armed Forces;

• the Army National Guard and the Air National Guard when engaged in active duty for training, inactive duty training, or fulltime National Guard duty;

• the commissioned corps of the Public Health Service; and

• any other category of persons designated by the President in time of war or national emergency.

​

See also 38 U.S.C. §4303(13) which further defines “service in the uniformed services” to include the performance of duty on a voluntary or involuntary basis in a uniformed service under competent authority and includes active duty, active duty for training, initial active duty for training, inactive duty training.

​

Qualified Employee

A qualified employee must have been employed for at least 91 days immediately before the active duty period.

​

Qualified Employer

An eligible small business employer is one that:

• Employs fewer than 50 employees on average during the tax year (apply aggregation rules under IRC §414).

• Provides differential wage payments under a written plan to all qualified employees.

​

Coordination with Other Credits

IRC §45P(c) requires reducing other credits based on employee compensation (e.g., research credit under §41) by the amount of the §45P credit for that employee. In general, the amount of any such other credit determined with respect to compensation of an employee must be reduced by the amount of the §45P credit determined with respect to that employee.

​

For example, the amount of any research credit or orphan drug credit otherwise allowable for compensation paid to any employee may be reduced by the credit for differential wage payments figured for that employee.

​

Disallowance for Uniformed Services Employment and Reemployment Rights Act (USERRA) Violations

No credit is allowed for any tax year in which the employer is under a final order for violating USERRA (38 U.S.C. §4323), plus the two succeeding years.

​

IRS Links & Filing Requirements

• For details, see 26 USC 45P and IRS Notice 2010-15, 2010-6 I.R.B. 390

• See IRS Form 8932 (Employer Differential Wage Payments Credit) and Form 3800