Improve Your Hiring Process While Generating a Tax Credit: The Work Opportunity Tax Credit

As the nationwide struggle to find both skilled and non-skilled employees continues in a post-pandemic environment, many manufacturers have been faced with a harsh reality that the current supply of individuals seeking employment has not met demand. With growing uncertainty regarding the correction of this trend, companies have turned to alternative methods of attracting and retaining talent across the industry.

A simple, yet often overlooked method for companies to widen their hiring pool involves completing eligibility requirements for the Work Opportunity Tax Credit. By simply modifying the existing employee onboarding process, a company can increase their pool of potential candidates while simultaneously qualifying for a lucrative tax break at the federal level.

What is the Work Opportunity Tax Credit?

The Work Opportunity Tax Credit, or WOTC, was designed to incentivize employers to hire candidates who have typically struggled to find gainful employment. Generally, an employer is eligible for the WOTC for qualified wages paid to those employees belonging to one of the following groups:

• • qualified IV-A recipients under the Temporary Assistance for Needy Families (TANF) program,
  • qualified veterans,
  • qualified ex-felons,
  • designated community residents,
  • vocational rehabilitation referrals,
  • qualified summer youth employees,
  • qualified members of families in the Supplemental Nutrition Assistance Program (SNAP),
  • qualified Supplemental Security Income (SSI) recipients,
  • long-term family assistance recipients, and
  • qualified long-term unemployed individuals.

Employers of all sizes are eligible to claim the WOTC. This includes both taxable and certain tax-exempt employers located in the United States and in some U.S. territories. In some cases, employers may elect not to claim the WOTC. And, in limited circumstances, the rules may prohibit the credit or require an allocation of it. However, for most employers that hire from targeted groups, the credit is available.

How Do I Claim the WOTC?

Claiming the WOTC is simple, but the process is often ignored by many who are otherwise eligible. Prior to beginning employment, potential hires must complete IRS Form 8850 and U.S. Department of Labor ETA Form 9061. The employer then submits the completed forms to the state workforce agencies in which the employer’s business is located (where the employee works) within 28 calendar days of the new hire’s start date. The state agency then uses the completed forms to verify the applicant is a first-time, qualifying member of a target group; if an applicant qualifies, the state agency will send a certificate for the qualifying applicant, to be used in the computation of the credit.

Employers looking to utilize this credit should strongly consider providing all necessary eligibility forms to any potential hires during their initial application process. The window to determine an applicant’s eligibility is very narrow; it is imperative that employers remain proactive when distributing forms to applicants, collecting completed applications and submitting an applicant’s information to their respective state agencies. If IRS Form 8850 and U.S. Department of Labor ETA Form 9061 are not received within 28 calendar days from an employee’s start date, the WOTC cannot be taken for the employee in question regardless of their eligibility. By simply altering the onboarding process and having applicants complete just two additional forms, employers have the potential to qualify for thousands of dollars in tax breaks.

There are several additional requirements to qualify for the credit. For instance, each employee must have completed a minimum of 120 hours of service for the employer. Also, the credit isn’t available for employees who are related to the employer or who previously worked for the employer. Additionally, an employer cannot claim the credit for an employee that previously worked for the employer and was rehired.

How Much Will I Receive as a Credit?

The rules and credit amounts differ for specific employees. The maximum credit available for the first year’s wages is $2,400 for each employee or $4,000 for a recipient of long-term family assistance. In addition, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000 ($4,000 for year one and $5,000 for year two).

For some veterans, the limits are $4,800, $5,600 or $9,600.  For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth workers is $1,200 per employee.

Planning Ahead

If you believe you qualify for the Work Opportunity Tax Credit and are considering its effect on your application process or would like assistance in determining your eligibility for the credit, please contact our office at (315) 472-9127 so we may assist your business in maximizing your WOTC.

Contributing author: Mickel Pompeii, CPA, CDA, is a tax partner with 13 years of experience in taxation and tax planning for individuals and closely held companies. He is responsible for overseeing tax engagements for a variety of the firm’s clientele, with a focus on manufacturing firms. This article was also co-authored by Nicholas Jim, a tax senior at Dannible & McKee, LLP.  For more information on this topic, you may contact Mickel at mpompeii@dmcpas.com or (315) 472-9127.