As we continue to navigate through the pandemic, many employers are facing hiring needs. With the high demand for employees, businesses may find themselves looking to different pools of applicants than they did before. What business owners may not know, however, is that they may be able to receive a federal tax credit to subsidize the payroll expense for employees who fall into a variety of categories.
The Work Opportunity Tax Credit (WOTC) has been around since 1996, and Congress recently extended this tax credit for employees hired through December 31, 2025. This tax incentive can be worth up to $9,600 for each employee who qualifies and is designed to encourage employers to hire people who have traditionally faced significant barriers to employment. The WOTC refers to these individuals as “targeted group employees.”
To qualify as a member of a targeted group, individuals must meet specific criteria within each category. The main categories of targeted group employees that qualify for the WOTC are:
- SNAP (food stamps) recipients,
- Welfare recipients,
- Designated community residents who are between the ages of 18 and 40 at their date of hire and reside within particular geographic areas,
- Supplemental Security Income (SSI) or disability recipients,
- Long-term unemployment recipients, which could present opportunities now since we recently experienced a period of high unemployment rates,
- Veterans, which include a few sub-categories of qualified individuals,
- Ex-felons,
- Vocational rehabilitation referral employees, and
- Summer youth employees who are between the ages of 16 and 18 at their hiring date and reside within particular geographic areas.
Generally, the WOTC is 40 percent of the first year wages of a targeted group of employees who worked 400 hours or more. For an employee who worked between 120 and 400 hours, the credit is 25 percent of the first year wages paid.
The credit is limited to a certain amount depending on which targeted group category the employee falls into. For example, the maximum credit for an employee who is a SNAP recipient is $2,400, while the maximum credit for an employee who served in any branch of the Armed Forces can be up to $9,600.
This tax credit is reported on the company’s federal income tax return and can be carried back one year or carried forward 20 years.
You may be asking yourself, “what’s the catch?” Many people feel the tight turnaround of the paperwork needed can be burdensome. For each targeted employee hired, the employer must obtain a certification from their state's workforce agency, which certifies the employee fits the criteria of a targeted group. Because this paperwork must be submitted to the applicable state’s workforce agency within 28 calendar days of the employee’s first day of work, adding this paperwork to the regular onboarding process can be effective. Unfortunately, there is currently no option to look back on employees who have already been hired beyond the 28 calendar day timeframe. However, by establishing an efficient process for handling the necessary filings, the WOTC can prove to be well worth the investment.
If you’d like to learn more about the Work Opportunity Tax Credit and how it may benefit your organization, please contact your Kreischer Miller relationship professional or any member of our Tax Strategies team.
Elizabeth Bishop is a Manager in Kreischer Miller's Tax Strategies Group. Contact her at Email.
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