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How the Work Opportunity Tax Credit Benefits Your Business and Supports Community Growth
Article Highlights:
Qualifications for Employees
Employer Certification Process
Tax Benefits for Employers
Special Circumstance Benefits
Fast-tracked Certification for Veterans
Other Issues
The Work Opportunity Tax Credit (WOTC) is a federal tax incentive designed to encourage employers to hire individuals from certain groups who have consistently faced significant barriers to employment. This initiative not only aids in reducing unemployment among these groups but also offers substantial tax benefits to employers, making it a win-win situation. In this article, we will delve into the qualifications necessary for employees to be eligible for the WOTC, the process employers must follow to claim the credit, and the specific tax benefits that can be realized.
Qualifications for Employees - For an employee to qualify their employer for the WOTC, they must belong to one of the following categories:
Veterans - Including those who are unemployed, have a service-connected disability, or are receiving SNAP benefits.
Long-Term Unemployment Recipients - Who have been unemployed for 27 weeks or more and have received state or federal unemployment benefits during part of that time.
SNAP (food stamp) Recipients - An individual who:
o Is at least age 18 but not yet age 40 on the hiring date, and
o Is a member of a family that -a. Has received SNAP benefits for the 6-month period ending on the hiring date or
b. Is no longer eligible for such assistance under section 6(o) of the Food and Nutrition Act of 2008, but the family received SNAP benefits for at least 3 months of the 5-month period ending on the hiring date.Designated Community Residents - These are individuals certified by the designated local agency as having attained age 18 but not age 40 on the hiring date, and as having their principal place of abode within an empowerment zone, enterprise zone, renewal community or rural renewal county. Wages that qualify for the WOTC don't include wages paid or incurred for services performed while the individual's principal place of abode is outside an empowerment zone or rural renewal county.
Vocational Rehabilitation Referrals - An individual who has a physical or mental disability resulting in a substantial handicap to employment and who was referred to the employer upon completion of (or while receiving) rehabilitation services by a rehabilitation agency approved by the state, an employment network under the Ticket to Work program, or the Department of Veterans Affairs.
Ex-felons - hired within a year of their conviction or release from prison.
Supplemental Security Income (SSI) Recipients - An individual who is receiving supplemental security income benefits under title XVI of the Social Security Act (including benefits of the type described in section 1616 of the Social Security Act or section 212 of Public Law 93-66) for any month ending during the 60-day period ending on the hiring date.
Summer Youth Employees - Who have never worked for the employer before and are 16 or 17 years old, work for the employer between May 1 and September 15, and live in an Empowerment Zone.
Recipients of Temporary Assistance for Needy Families (TANF) - The assistance must be received for any 9 months during the 18-month period ending on the hiring date.
Qualified Long-Term Family Assistance (TANF) Recipients - A qualified individual is one who is a member of a family that:
o Has received temporary assistance for needy families (TANF) payments for at least 18 consecutive months ending on the hiring date, or
o Receives TANF payments for any 18 months (whether consecutive) beginning after August 5, 1997, and the earliest 18-month period beginning after August 5, 1997, ended during the past 2 years, or
o Stopped being eligible for TANF payments because federal or state law limits the maximum period such assistance is payable, and the individual is hired not more than 2 years after such eligibility ended.
Employer Certification Process - To claim the WOTC, employers must first obtain certification that the hired individual is indeed a member of a targeted group. This involves submitting IRS Form 8850, "Pre-Screening Notice and Certification Request for the Work Opportunity Credit," to the state workforce agency within 28 days of the employee's start date. If the state workforce agency confirms the employee's eligibility, the employer can then claim the tax credit.
Tax Benefits for Employers - The value of the WOTC varies depending on the targeted group to which the employee belongs and the number of hours they work. Generally, the credit is worth:
40% of the first $6,000 in wages paid to the employee if they work at least 400 hours.
25% of the first $6,000 in wages if the employee works at least 120 but fewer than 400 hours.
Special Circumstance Benefits
Long-Term Family Assistance (TANF) Recipients - The first-year wages considered for this group is $10,000 with a maximum credit of $4,000 per employee. In addition, this group qualifies for second year credit equal to 50% of up to $10,000 of the second-year wages. A qualified individual is one who is a member of a family that:
o Has received temporary assistance for needy families (TANF) payments for at least 18 consecutive months ending on the hiring date, or
o Receives TANF payments for any 18 months (whether consecutive) beginning after August 5, 1997, and the earliest 18-month period beginning after August 5, 1997, ended during the past 2 years, or
o Stopped being eligible for TANF payments because federal or state law limits the maximum period such assistance is payable, and the individual is hired not more than 2 years after such eligibility ended.Veteran Who is a Member of a Family Receiving Food Stamps for at least Three Months - The individual is a member of a family receiving assistance under a food stamp program under the Food and Nutrition Act of 2008 for at least three months, all, or part of which is during the 12-month period ending on the hiring date. The maximum qualifying first-year wage considered is $6,000. Thus, the maximum WOTC is $2,400 (.4 x $6,000)
Veteran Entitled to Compensation for a Service-Connected Disability Hired Within First Year after Separation from Service - The veteran must be entitled to compensation for a service-connected disability and have a hire date that isn’t more than one year after having been discharged or released from active duty. The maximum qualifying first-year wage considered is $12,000. Thus, the maximum WOTC is $4,800 (.4 x $12,000)
Veteran Entitled to Compensation for a Service-Connected Disability with Six Months of Unemployment in the Year Preceding the Hire Date - The veteran has aggregate periods of unemployment during the 1-year period ending on the hiring date that equal or exceed six months. The maximum qualifying first-year wage considered is $24,000. Thus, the maximum WOTC is $9,600 (.4 x $24,000)
Veteran Has Aggregate Periods of Unemployment Exceeding Four Weeks in the Year Preceding the Hire Date - The veteran has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed four weeks (but less than six months). The maximum qualifying first-year wage considered is $6,000. Thus, the maximum WOTC is $2,400 (.4 x $6,000)
Veteran Has Aggregate Periods of Unemployment Exceeding Six Months in the Year Preceding the Hire Date - The veteran has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months. The maximum qualifying first-year wage considered is $14,000. Thus, the maximum WOTC is $5,600 (.4 x $14,000)
Fast-tracked Certification for Veterans - A veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements if he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for:
Not less than six months during the 1-year period ending on the hiring date.
Not less than four weeks (but less than six months) during the 1-year period ending on the hiring date.
Other Issues:
No credit is allowed for an employee who is related to the employer or to certain owners of the employer, or who is a dependent of the employer.
Wages used to calculate the WOTC cannot also be used for other credit calculations.
The credit is generally not available for employment of prior employees or replacements for employees on strike or locked out and employees who are receiving federally funded on-the-job-training.
This credit is part of the general business credit and any credit not used in the current year carries back one year and then forward for 20 years.
No credit is allowed for wages paid or incurred in carrying on a cannabis (marijuana) business, even if the employees hired are from the groups targeted by the WORC.
While the WOTC offers significant tax advantages, it's essential for employers to weigh these benefits against the administrative requirements of participating in the program. Employers should consider the potential impact on their hiring practices, the process of certifying eligible employees, and the integration of these employees into their workforce.
For more information or a consultation to determine if the WOTC is right for your business, please contact this office.