The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to qualified employers and tax-exempt organizations when they hire individuals from certain targeted groups who have consistently faced significant barriers to employment.
Generally speaking, this program can significantly benefit certain target groups made up of individuals who are faced with challenges in the job market. Private sector businesses and non-profit organizations who provide certain preferential treatment for job placement to these groups can receive significant Federal tax credit benefits.
Recent changes in the Work Opportunity Tax Credit
The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) retroactively allows eligible employers to claim the Work Opportunity Tax Credit (WOTC) for all targeted group employee categories that were in effect prior to the enactment of the PATH Act, if the individual began or begins work for the employer after December 31, 2014, and before January 1, 2020. For tax-exempt employers, the PATH Act retroactively allows them to claim the WOTC for qualified veterans who begin work for the employer after December 31, 2014, and before January 1, 2020. The PATH Act also added a new targeted group category to include qualified long-term unemployment recipients.
The win-win WOTC program began in October 1996 and has undergone several expirations and renewals by Congress. However, this is only the second time in the program’s history that it has received a 5-year renewal.
The U.S. Department of Labor and the U.S. Department of Treasury, through the IRS, administer the WOTC. The DOL, through the Employment and Training Administration (ETA), provides grant funding and policy guidance to the State Workforce Agencies (SWA) to administer the certification process. The IRS administers all tax-related provisions and requirements.
How does the Work Opportunity Tax Credit help business owners?
As a qualified private sector employer or tax-exempt organization, certain one-time tax credits ranging from $1,200 to $9,600 per employee are available after hiring qualified individuals for full or part-time employment. Their IRS reminds employers they must obtain certification that an individual is a member of the targeted group before the employer may claim the credit. The eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work. Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850.
Any business owner who has business investments through the Opportunity Zone and Funding program could benefit further by taking advantage of the tax credits related to the OZ Zone requirements. A potential employee who resides within an Opportunity Zone, and will remain there during employment and is between 18 and 40 years of age, is within the workgroup Designated Community Resident and could qualify for this tax credit.
There are certain limitations on the credits:
- The credit is limited to the amount of the business income tax liability or social security tax owed
- A taxable business may apply the credit against its business income tax liability, and the normal carry-back and carry-forward rules apply. Instructions for Form 3800, General Business Credit offer more details
- For qualified tax-exempt organizations, the credit is limited to the amount of employer social security tax owed on wages paid to all employees for the period the credit is claimed.
Along with the above limitations, the tax credit is calculated only on the qualified first-year wages. Employees must work at least 120 hours in the first year of employment to be eligible. Two factors affect the calculation of the tax credit:
- The number of hours the new hire works determines the rate or percentage that is applied to the qualified first-year wages, and
- each target group has a first-year wage cap to which the percentage is applied
Further, qualified tax-exempt organizations will claim the credit on Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, as a credit against the employer’s share of Social Security tax. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return.
Which individuals benefit from the WOTC?
Recipients of job opportunities qualifying for tax credit must belong to Work Opportunity Tax Credit target workgroups. These individuals are considered to be facing certain barriers to employment. The work groups also contain specific guidelines (details in IRS link at end). Current workgroups are:
- qualified veteran
- qualified ex-felon
- designated community resident
- vocational rehabilitation referral
- summer youth employee
- recipient of SNAP benefits (food stamps)
- supplemental Security Income (SS) recipient
- long-term family assistance recipient, or a
- qualified long-term unemployment recipient
Within the specific workgroups, new 2019 bills have been introduced to expand participation. These could include individuals receiving SS disability benefits and the “Hire A Hero Act of 2019” which would include members of the Ready Reserve or National Guard. We should expect to see other bills presented to enrich the definitions of individual workgroups.
The Work Opportunity Tax Credit could be a WIN-WIN for your business
Working with the WOTC sounds straightforward and simple for both the employer and the employee. However, it’s more complicated below the surface. Many businesses don’t have the staff to consistently be diligent when looking for or following through with every new hire. Having missed an opportunity to benefit both the employer and a potential employee isn’t something either want to continue doing.
An employer’s decision to hire an individual fitting within a specific workgroup should fit the overall scope of the company’s business plan and financial goals. Any decision made only for tax purposes could easily turn into another example of the Tax Tail wagging the dog.
There is no doubt that the Work Opportunity Tax Credit has provided job opportunities and tax benefits. Since the implementation of the WOTC, over $1 billion business tax credits have benefited qualified employers and non-profit organizations. The individuals who qualified as employees have benefited by receiving an opportunity which they may have otherwise missed.
What’s the bottom line?
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