Is the Work Opportunity Tax Credit an opportunity for your business?
Posted On: 7-8-2016 | Posted By: Deb Harrington, CPA
If your business meets certain criteria, you can significantly reduce your tax burden while giving a boost to veterans, the chronically unemployed and other targeted groups by taking advantage of the Work Opportunity Tax Credit (WOTC). The WOTC was created to increase and promote job creation and to decrease unemployment among specific groups of people.
The WOTC was first created in 1996 and has been extended, expired and modified many times over the years. The most recent update was included in the Protecting American from Tax Hikes Act of 2015 (PATH Act). This complicated history makes applying for the credit a little onerous, and many businesses have either outsourced the application process or skipped it altogether. However, the WOTC might be worth a second look if you’re looking to reduce the cost of hiring new employees.
How it Works
The WOTC allows for-profit employers, including flow-through entities, to claim a credit against their federal income tax liabilities for hiring members of certain eligible groups. For most, the credit is 40 percent of the first $6,000 in wages paid during the worker’s first year of employment, or $2,400. The new hire must not be a prior employee, the employer’s dependent or related to employer, and he or she must work at least 120 hours.
The credit is available to employers that hire workers included in the following target groups.
TANF recipients. Any short-term recipient of Temporary Assistance to Needy Families (TANF). The individual qualifies if he or she received TANF benefits for any 9-month period during the 18-month period ending on the hiring date.
Veterans. Hiring veterans will qualify for the WOTC if they are :
- a member of a family that received food stamps benefits for at least a 3-month period during the 15-month period ending on hiring date; or
- entitled to compensation for a service-connected disability hired within one year of discharge or release from active duty; or
- entitled to compensation for a service-connected disability and unemployed for a period or periods totaling at least 6 months of the year ending on the hire date; or
- unemployed for at least 4 weeks (but less than 6 months) during the one-year period ending on the hiring date; or
- unemployed for at least 6 months or more within one year of the hiring date.
In addition, to be considered a qualified veteran for this purpose, the individual must meet the following two standards:
- served on active duty, not including training, in the US Armed Forces for more than 180 days or have been discharged or released from active duty for a service-connected disability; and
- not have a period of active duty, not including training, of more than 90 days that ended during the 60-day period concluding on the date of hire.
Ex-felons. Hiring ex-felons will qualify for the WOTC if they have been convicted of a felony under any statute of the US or any state and if they have a hire date that is not more than one year after the last date on which the individual was convicted or released from prison.
Other qualified individuals. Other groups targeted by the WOTC include Qualified Designated Community Resident, Qualified Vocational Rehabilitation Referral, Qualified Summer Youth Employee, Qualified Supplemental Security Income Recipient and Qualified Long-Term TANF Recipient.
The PATH Act added a new target group whose hiring will qualify for the WOTC – qualified long-term unemployment recipients. This provision is effective January 1, 2016. The PATH Act also extended the entire WOTC through December 31, 2019.
Under the PATH Act, a qualified long-term unemployment recipient is any individual who is certified by a designated local agency (DLA) as being in a period of unemployment which is not less than 27 consecutive weeks and includes a period in which the individual was receiving unemployment compensation under state or federal law.
Complying with the Requirements
The IRS recently published a notice to provide transition relief for complying with the requirements for attaining certification for the WOTC. The transition relief extends time for filing the required IRS Form 8850 with the DLA as follows.
- An employer that hires an individual who is a member of one of the original targeted groups (not the long-term unemployed, as modified by the PATH Act) as outlined above and who began work between January 1, 2015, and August 31, 2016, will be considered to have satisfied the requirements if the employer submits the completed Form 8850 to the DLA to request certification no later than September 28, 2016.
- An employer that hires an individual who is a long-term unemployment recipient as outlined under the PATH Act and who begins work for the employer between January 1, 2016, and August 31, 2016, will be considered to have satisfied the requirements if the employer submits the completed Form 8850 to the DLA to request certification no later than September 28, 2016.
For any new hire on or after September 1, 2016, who qualifies as one of the targeted groups, the transitional relief does not apply. The rules for complying are as follows.
- On or before the day the individual begins work, the employer obtains certification from the DLA that the individual is a member of a targeted group.
- Alternatively, the employer complete a pre-screening notice on or before the day the individual is offered employment and submits notice to the DLA to request certification no later than 28 days after the individual begins work. This is done by submitting IRS Form 8850 to the DLA.
In addition, there is another certification form that must be completed and sent to the DLA in conjunction with Form 8850 – either Employment and Training Administration Form 9062 or 9061.
The form to claim the credit is Form 5884. However, certification notification has to be received from the DLA before the credit can be claimed.
This is just an overview of the WOTC rules, and they are a little complicated. If you think your business might qualify and would like to learn more, please contact your WK advisor at (573) 442-6171 or (573) 635-6196.