Tax Services • Published 8/27/2019 Save Big With Your New Hires: Work Opportunity Tax Credits

Business situations are not always win-win for everyone, but with the Work Opportunity Tax Credit (WOTC), both the employer and its employee can win. The WOTC is a federal tax credit available to any employer who hires individuals from certain targeted groups. The WOTC helps organizations both fill a labor void and lower its tax liability, while also providing employment benefits and opportunities to individuals who might otherwise have difficulty finding a job.

This article will discuss which types of employees qualify, the benefit to employers, and what they need to do to qualify.

Who are the targeted groups^[1]?

The targeted groups focus on individuals who have consistently faced barriers to employment. They include:

1. Low-Income Individuals
   • Examples of qualifying individuals are those that:
     • Receive Supplemental Nutrition Assistance Program (SNAP) payments;
     • Receive assistance from a Title IV state approved program;
     • Reside in designated low-income areas; or
     • Receive Supplemental Security Income (SSI).
2. Qualified Veterans
   • A veteran is “qualified” if they are:
     • A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) for at least 3 months during the first 15 months of employment;
     • Unemployed for a period totaling at least 4 weeks within the last year; or
     • A disabled veteran entitled to compensation for a service-connected disability hired not more than one year after being discharged.
3. Qualified Ex-Felon: An ex-felon is qualified if the individual was hired within one year of being convicted of a felony or being released from prison for the felony.
4. Summer Youth Employee: This includes an employee between the ages of 16 and 18, who works between May 1 and September 15, and lives in specified low-income areas.
5. Qualified Long-Term Unemployment Recipient: Individuals qualify under this category if they have been unemployed for at least 27 consecutive weeks and were receiving unemployment compensation during some or all of the period.

How much can you save?

The WOTC is a federal non-refundable tax credit, generally limited to $2,400 per qualifying employee. However, it's possible to receive a credit as high as $9,600 per qualifying employee depending on various factors relating to the qualifying employee, such as the number of hours the employee works and the amount of compensation paid to the employee.

To qualify for any part of the credit, an employee must work at least 120 hours. If a qualifying employee works between 120-400 hours, the amount of the credit is 25% of qualifying wages. If the qualifying employee works 400 hours or more, it will qualify for the maximum credit, which is 40% of qualifying wages.

What do you need to do to qualify?

In order to verify a job applicant is a qualifying employee for purposes of the credit, the employer must submit IRS Form 8850 with the Department of Labor Employment and Training Administration Form 9061 or 9062 to the appropriate state workforce agency.

The information must be submitted within 28 days of the employee’s hiring. After submission, the state will then go through a verification process in order to certify that the employee qualifies. Once the employee is certified, the employer is eligible to claim the tax credit.

Thus, including a couple of additional forms or questions in your employee on-boarding process could mean considerable tax savings for your company. If you have questions about how the Work Opportunity Tax Credit might apply to your organization, reach out to your P&N tax advisor.

 

[1] These are examples of targeted groups. Please contact a P&N tax advisor to determine if your business can take advantage of the WOTC for any employee hiring.