Do you plan to expand your work force? If so, the Work Opportunity Tax Credit (WOTC) is a federal nonrefundable tax credit that provides an incentive for hiring individuals that have faced certain barriers to employment. The Protecting Americans from Tax Hikes Act (PATH) recently extended the availability of the WOTC through the tax year ending December 31, 2019. Targeted groups include veterans, ex-felons, individuals receiving welfare benefits, food stamps and/or supplemental social security benefits, and summer youths that are 16-17 years of age and living in federally designated Empowerment Zones. Additionally, for the tax year beginning January 1, 2016, qualified long-term unemployment recipients have been added as a targeted group. Long-term unemployment recipients are individuals that have been unemployed for 27 consecutive weeks or more. There are no limits to the number of employees that can qualify for the WOTC for a given year; however there is a maximum amount of credit that can be received per employee based on the amount of hours that the employee works and the wage maximum for the employee’s targeted group.
An eligible employee must work at least 120 hours in the first year of employment for the employer to qualify to claim the WOTC. After working the 120 hours, the employer can claim a credit of up to 25% of the new hire’s first year of qualified wages. The maximum credit on first year wages is between $750 (for summer youth employees) and $6,000 (for disabled veterans previously unemployed at least 6 months before the hiring) depending on the eligible targeted group. If the employee works at least 400 hours, the employer may claim a credit equal to 40% of the new hire’s first year of wages, with a maximum credit on first year wages between $1,200 (for summer youth employees) and $9,600 (for disabled veterans previously unemployed at least 6 months before the hiring) depending on the targeted group.
Generally, the WOTC is available only for the first year of employment. There is a special rule for employees included in the Long-Term Temporary Assistance for Needy Families targeted group (individuals who receive welfare benefits). Employers who hire such individuals may claim a credit equal to 50% of the second year wages, up to the maximum tax credit of $5,000 per employee. However, such employees must work at least 400 hours for the employer to be eligible for the credit.
The application process to claim the WOTC is not arduous, merely requiring the completion of a few IRS forms. However, the employer must request and receive certification from its State Workforce Agency (SWA) stating that the new hire is a member of at least one of the WOTC target groups. The forms requesting this certification must be submitted to the SWA within 28 calendar days after the job applicant begins work. If the forms are not submitted by then, the certification will be denied.
The WOTC provides employers with the opportunity to hire individuals in designated targeted groups who have trouble competing in the job market and to receive a tax credit for doing so. With the recent expansion of the targeted group to include qualified long-term unemployment recipients, the pool of qualified employees is greatly increased. If you are looking to hire new employees and are interested in learning about the WOTC, please contact your Friedman LLP professional for further assistance.