Businesses frustrated by regulations and heavy tax burdens often perceive their own interests as at odds with those of the government. But there is at least one facet of the tax code at which the interests of private businesses and the government converge, saving both billions of dollars per year: the Federal Work Opportunity Tax Credit (WOTC). Designed to remedy a persistently high unemployment rate among certain groups, including veterans, WOTC saves businesses up to $9,000 for each new employee hired from a target group, while saving states an estimated $1.7 billion per year as the credit helps certain recipients of government assistance achieve economic self-sufficiency. (Source: http://www.ezpolicyblog.com/nasbo-touts-savings-to-states-from-wotc/).
WOTC is available to for-profit businesses of all sizes and some tax-exempt organizations that may qualify by hiring veterans and applying the credit towards the employer’s share of Social Security taxes. (Source: http://www.doleta.gov/business/incentives/opptax/PDF/employers_wotc_program_brochure_5_24_12.pdf).
Although WOTC lapsed on December 31, 2013, the U.S. Department of Labor encourages employers to continue submitting applications because Congress has typically renewed it retroactively when it has lapsed in the past. Given the benefits that WOTC provides to employers, qualifying employees, and society, it understandably enjoys broad support and there is reason to be optimistic about its renewal. (Source: http://www.doleta.gov/business/incentives/opptax/wotcEmployers.cfm).
In order to qualify for WOTC, a business must hire a member of one of the target groups that the credit was designed to help. These include certain recipients of government assistance, such as Temporary Assistance for Needy Families (TANF), veterans, youths employed for the summer, and ex-offenders. A complete list of target groups and the specific requirements for each group may be found at the U.S. Department of Labor’s website (http://www.doleta.gov/business/incentives/opptax/eligible.cfm). The new hire may not be a member of the employer’s family or a majority owner of the business, and must not have worked for the employer at any time in the past. There is no limit to the number of new employees that may qualify, so a business undertaking a large expansion of its labor pool may reap tens of thousands of dollars in savings. (Source: http://www.doleta.gov/business/incentives/opptax/PDF/employers_wotc_program_brochure_5_24_12.pdf).
The credit amount for each new hire ranges from $1,200 to $9,000 and is calculated based on the target group to which the employee belongs and the number of hours that he or she works in the first year of employment:
- If the employee works at least 120 but less than 400 hours, the credit will equal 25 percent of the employee’s first year wages, up to $6,000.
- If the employee completes at least 400 hours, the credit will be 40 percent of first year wages, up to $6,000.
An employer may realize the maximum amount of the credit, up to $9,000 over two years, by hiring a long-term AFDC or TANF recipient who works at least 400 hours.
Once an employer has identified a potential new hire from one of the target groups, only a few steps remain before the employer may reap the rewards of WOTC:
- Step One: The employer must file Form 8850 to prescreen employees with the state workforce agency (SWA). This must be done before the employer claims WOTC on its tax return and no later than 28 days after the date the employee begins work.
- Step Two: The employer must submit Form 9061, the Individual Characteristics Form, to the SWA.
- Step Three: If the SWA determines that the new employee qualifies the employer for WOTC, the employer must file with the IRS, typically using Form 5884.
If your business is planning to hire new employees, Capital Review Group provides the expertise you need to harness maximum tax savings under WOTC. CRG’s customized approach assumes the entire administrative burden of the program without interfering in any way in our client’s hiring procedures. Contact CRG for more information.