If your business is picking up steam, you may be looking to expand your workforce to meet the demand. Here’s a practical idea: Hire employees who qualify for the Work Opportunity Tax Credit (WOTC). The credit is available for workers who represent one of the “target” groups specified by law. There’s no limit on the number of workers for whom you can claim this tax break, which can cut tens of thousands from your company’s tax bill.
Years ago, the WOTC was included in a list of “tax extenders” that were approved by Congress at the end of each year or every couple of years. But more recent legislation extended the WOTC through 2025.
How Does It Work?
Briefly states, the WOTC is based on the number of hours worked and wages earned in an employee’s first year of employment. If the employee works at least 120 hours, the credit is equal to 25% of first-year wages up to $6,000, for a maximum credit of $1,500 per employee.
If the employee works at least 400 hours, the credit jumps to 40% of first-year wages up to $6,000, for a maximum credit of $2,400 per employee. In addition, for a veteran with a service-connected disability, the credit is available for the first $24,000 of wages, for a maximum of $9,600 per employee.
The credit is a dollar-for-dollar reduction of tax liability.
The current list of target groups includes:
|Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients||These individuals are part of a family receiving assistance from a state plan approved under Part A of Title IV of the Social Security Act relating to TANF.|
|Qualified veterans, including disabled veterans||The veteran must be unemployed for at least four weeks, whether or not consecutive, but for less than six months in the one-year period ending on the hiring date.|
|Qualified ex-felons||This is a person hired within a year of being convicted of a felony or being released from prison.|
|Designated Community Residents||The worker must reside in an empowerment zone, enterprise community, or renewal community and continue to live there after employment.|
|Vocational rehabilitation referrals||This applies to someone with a physical or mental disability who has been referred to the employer during or after rehabilitative services under certain programs.|
|Supplemental Nutrition Assistance Program (SNAP) recipients||This covers members of a family that received SNAP benefits for the previous six months or at least three of the previous five months.|
|Supplemental Security Income (SSI) recipients||A person is a qualified recipient for any month in which he or she received SSI benefits, within 60 days of the hiring date.|
|Long-term family assistance recipients||This applies to family members that receive assistance under a Title IV-A program.|
|Qualified long-term unemployment recipients||This is someone who has been unemployed for not less than 27 consecutive weeks at the time of hiring and has received unemployment compensation during this time.|
What About Summer Help?
Be aware that there’s also a special “summertime” version of the credit. You can claim it if you hire youths aged 16 or 17 who reside in an empowerment zone or enterprise community. This credit is equal to 40% of the first $3,000 of wages paid between May 1 and September 15, up to a maximum of $1,200 per qualified employee. So, if your company hires five qualified workers for the summer and pays them at least $3,000 each, it can pocket an extra $6,000 in credits.
Caveat: Benefiting from the WOTC isn’t automatic. Your company is required to obtain proof that a worker is a member of a target group before it can claim the credit by filing Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit.” This form must be submitted within 28 days after the eligible worker begins work (unless transitional rules apply).
Hit a Tax-Saving Target
Fortunately, you don’t have to do it alone. Your professional tax advisor can provide the assistance needed to claim the maximum credit for your company’s situation.