Did you know that hiring certain individuals for your business can create an additional tax benefit? How would you like to add an experienced veteran to your organization or hire an individual who can add value to your business but has experienced some hard times? The Work Opportunity Tax Credit, also known as WOTC, was designed with these exact situations in mind. WOTC is a federal tax credit available to employers who choose to hire a certain targeted population. This population usually revolves around a group of people who are facing some sort of discrimination due to their present circumstances. The tax credit allows an employer, who hires individuals from the targeted population, to receive a tax credit against a percentage of wages paid to the employees.
Here is how it all works
Every few years, Congress renews the WOTC program by identifying and evaluating the needs of certain targeted populations. Once the need has been identified, Congress sets the particular credit amount available for each targeted population. This tax credit is then used as an incentive to encourage employment of the targeted population group.
Under current guidelines, Congress has established a number of targeted populations including qualified veterans, individuals receiving governmental assistance including Supplemental Nutrition Assistance Program (“SNAP”) and Temporary Assistance for Needy Families (“TANF”), former felons, Supplemental Security Income recipients, and those who have experienced long-term unemployment (usually an individual receiving unemployment insurance for 27 weeks or more). The eligibility criteria for each of the targeted population is fairly straightforward but a thorough review should be conducted in order to determine if a “new” employee qualifies for the tax credit. Each target population is eligible for a different credit amount ranging from $1,200 for summer youth employees and up to $9,600 for unemployed and disabled veterans.
The WOTC credit used to only be available to for-profit entities by way of allowing a nonrefundable business tax credit (meaning you couldn’t take your liability lower than zero), however, under new guidelines a nonprofit entity may be able to take advantage of the WOTC tax credit if they hire a qualified unemployed veteran. Since a nonprofit does not have income tax to offset, IRS guidelines provide that a nonprofit entity can take a credit against its employer portion of Social Security for that employee.
Here is how you calculate the available credit
Current guidelines provide a tiered structure to determine the amount of applicable credit that can be claimed. For every employee (except a previous TANF recipient), an employer can claim a credit of 25% of the wages paid to that employee, up to the applicable limit, if the employee works at least 120 hours but less than 400 hours during the first year. If the employee works more than 400 hours than an employer may claim a credit of up to 40% of wages, up to the applicable limit. For a previous TANF recipient, if the employee works at least 400 hours, an employer can claim a 40% tax credit for the first-year wages and 50% of the second-year wages.
Here is how you obtain the credit
The IRS has provided employers a form, Form 8850, Pre-Screen Notice and Certification Request for the Work Opportunity Credit that ask all the necessary questions to determine eligibility for the tax credit. If the new “employee” meets the eligibility requirements then the employer submits a request to the applicable workforce development agency for their state for certification. The request for certification must be submitted within 28 days from the employee’s start date so be sure to conduct the screening during your normal new hire orientation.
Although the value of a tax credit should never be the sole reason a particular employee may be hired, it should definitely be a consideration. There are a number of successful companies who demonstrate a commitment to hiring individuals from disadvantaged backgrounds including Columbus-based Hot Chicken Takeover and Bay-Area based The Town Kitchen. Therefore, don’t be afraid to take a shot on someone from a disadvantaged background. There might just be a tax break for you.
If you have questions about your company’s eligibility for tax credits reach out to Robinson Legal. We would be happy to evaluate your unique situation and help identify tax savings opportunities.