Last December, President Trump signed the Consolidated Appropriations Act of 2021, which included $1.4 trillion to fund the government through fiscal year 2021, as well as a number of important tax provisions. One of the little-known and under-utilized benefits in that Act is the extension of the Work Opportunity Tax Credit (WOTC) through December 2025. The WOTC provides a general business tax credit of up to $9,600 to employers that hire and retain individuals from certain targeted groups, such as veterans, ex-felons, summer youth, SSI recipients, long term unemployed and more.
This month, the Internal Revenue Service even reminded employers to check out the valuable tax credit available to them for hiring long-term unemployment recipients and other groups of workers facing significant barriers to employment. This tax credit encourages employers to hire workers certified as members of certain targeted groups facing barriers to employment. With millions of Americans out of work at one time or another since the pandemic began, the IRS noted that one of these targeted groups is long-term unemployment recipients who have been unemployed for at least 27 consecutive weeks and have received state or federal unemployment benefits during all or part of that time.
The amount of the credit, per employee, is no small matter. Employers generally can earn a tax credit equal to 25% of the employee’s first-year wages, as long as the employee works at least 120 hours or 40% of the first-year wages, once the employee works at least 400 hours. Wages up to $6,000 are eligible, therefore, the typical credit for the first year is $2,400 (40% of $6,000) and if the employee is a qualified veteran, wages up to $24,000 are eligible. This allows the maximum credit of $9,600 (40% of $24,000.) A list of the targeted groups includes:
- Formerly incarcerated or those previously convicted of a felony
- Recipients of state assistance under part A of title IV of the Social Security Act (SSA)
- Residents in areas designated as empowerment zones or rural renewal counties
- Individuals referred to an employer following completion of a rehabilitation plan or program
- Individuals whose families are recipients of supplemental nutrition assistance under the Food and Nutrition Act of 2008
- Recipients of supplemental security income benefits under title XVI of the SSA
- Individuals whose families are recipients of state assistance under part A of title IV of the SSA
- Individuals experiencing long-term unemployment of at least 27 consecutive weeks
The process is somewhat easy. On or before the day that an offer of employment is made, the employer and the job applicant must complete Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit). This actually allows you to determine if you may be eligible for a credit even before hiring the individual. Once hired, you have 28 calendar days from the new employee’s start date to submit Form 8850 and the Individual Characteristics Form to the designated state agency located in the state in which the business is located, where the employee works. Following receipt of a certification from the state that the employee is a member of one of the targeted groups, taxable employers file Form 5884 (Work Opportunity Credit) and tax-exempt employers file Form 5884-C (Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans) to claim the WOTC on their corporate tax return. Tax-exempt employers will be allowed to take the credit for the Qualified Veteran group against their payroll tax liability, rather than the corporate tax.
The US Department of Labor published an Eligibility Desk Aid, which is a great quick reference to the program. If you do not collect Form 8850 on every applicant, you may be missing out, as you are, quite possibly, hiring individuals from one of these designated groups.
While I make every attempt to ensure the accuracy and reliability of the information provided in this article, the information is provided “as-is” without warranty of any kind. There are many details and states listed above and the information is not comprehensive or conclusive. PayMaster, Inc and Romeo Chicco do not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained. Consult with your CPA, Attorney, or HR Professional to ensure compliance.