Each year, the Work Opportunity Tax Credit (WOTC) saves taxpayers tens of thousands of dollars for undertaking a step that is essential to growing their businesses: hiring new employees. Typically, employers must file the requisite paperwork for claiming WOTC within 28 days of hiring a qualifying worker. However, for 2015 and part of 2016, the IRS granted taxpayers a special opportunity to retroactively seize the savings available through WOTC.
Under IRS Notice 2016-40, businesses may claim WOTC for employees hired between January 1, 2015 and August 31, 2016, as long as they file the paperwork with their state workforce agencies (SWAs) by September 28, 2016. With potential tax savings of up to $9,600 per qualifying employee—and no limit on the number of eligible employees—businesses should act swiftly to determine if they have hired any workers who qualify for WOTC during the look-back period. As the deadline for taking advantage of this generous opportunity rapidly approaches, here are the steps that businesses must take in order to reap the benefits of the Work Opportunity Tax Credit:
1. Review all hiring decisions made between January 1, 2015 and August 31, 2016, and determine if any new workers were hired from a WOTC target group. Designed to assist individuals who have faced significant obstacles in securing employment, these groups include veterans, recipients of certain forms of government assistance, youths who work for the employer over the summer, ex-felons, and more. Businesses may also claim WOTC if, on or after January 1, 2016, they hired members of the most recently added target group—long-term recipients of unemployment assistance. For a complete list of target groups and the specific requirements for each, visit the Department of Labor’s website.
2. Verify the number of hours that each eligible hire worked during his or her first year of employment. The exact credit amount available to employers depends upon the group from which the individual was hired, the number of hours that he or she worked in the first year, and the wages paid. For most target groups, if a new hire completes the minimum of 120 hours of work in his or her first year of employment, the employer is eligible for a tax credit of 25 percent of the wages paid, up to the maximum amount for the target group from which the individual was hired. If an employee works at least 400 hours, the employer’s credit amount may reach 40 percent of the first-year wages.
3. File Form 8850, Pre-Screening Notice and Certification Request, with the SWA for the state in which the business is located no later than September 28. The SWA will rely on this form to ensure that the new employee belongs to a target group. Form 8850 must be signed by both the employer and the new hire. This form is available for download at the IRS website.
4. Submit either Form 9061, Individual Characteristics Form, or Form 9062, Conditional Certification Form, to the SWA by September 28. Some applicants receive Form 9062 from participating agencies, such as Job Corps; Form 9061 is used for all other applicants who may qualify the employer for WOTC. Employers may download Form 9061 at the Department of Labor’s website.
5. Once an employee is certified as WOTC eligible, businesses must submit Form 5884 to the IRS in order to claim the credit. This form is typically submitted with the employer’s federal tax return.
Although this special look-back period is ending soon, WOTC will be available through 2019 under the Protecting Americans from Tax Hikes (PATH) Act. For workers hired on or after September 1, 2016, businesses will have to comply with the standard 28-day deadline for submitting paperwork to their SWAs. As employers prepare to make future WOTC-eligible hires, they should ensure that they have effective screening processes in place in order to simplify the process of claiming this valuable incentive.
The tax code is rife with complex requirements and rigid deadlines. Therefore, one of the most important steps that businesses can take when seeking to maximize their tax savings is to invoke the help of professional tax experts. Capital Review Group is experienced at helping clients offset the costs of hiring and improve net profits with WOTC. The clock is ticking for this rare WOTC look-back period—contact CRG today!
(Sources: https://www.irs.gov/pub/irs-pdf/i8850.pdf, https://www.doleta.gov/business/incentives/opptax/wotcEmployers.cfm).