An Overlooked Benefit: The Work Opportunity Credit
In the midst of what seems like a never-ending wave of tax law changes, potential changes, and other planning it can sometimes be easy to overlook credits and tax incentives that have been around for a while but may not have annual applicability. In that vein, let’s look at a credit that can sometimes be forgotten, but can provide employers a nice benefit in their hiring practices. It could also help expand a potential employer’s field of employees in a competitive job market.
The Basics
The goal of the Work Opportunity Tax Credit (WOTC) is to encourage employers to hire individuals from specific targeted groups that historically have faced challenges to gaining employment. The credit is administered jointly by the Internal Revenue Service and Department of Labor. It becomes available for employers who hire employees that are certified by an applicable local agency as members of eligible target groups . Taxable employers will claim the credit on their income tax returns while tax-exempt employers will claim the credit against their payroll taxes.
The credit equals 40% of the wages paid (up to $6,000 for many targeted groups, up to $24,000 for certain qualified veterans, and up to $1,200 for summer youth employees). The credit rate is reduced to 25% for employees who perform fewer than 400 but have at least 120 hours of service for the employer. The credit is 50% of second year wages for long-term family assistance recipients. For example, an employee in the first target group shown in the chart below who earned wages of $6,000 would generate a credit of $2,400. Like a number of other tax credits, some rules designed to prevent double-dipping will force a for-profit taxpayer to reduce its wage deduction by the amount of the credit. For instance, a C Corp employer that generates a $2,400 credit will achieve a true benefit (ignoring any potential state tax effect) of $1,896 ($2,400 – (2,400 * 21%)) due to the “lost” deduction. So while this credit likely won’t be an end all be all for a financial institution, it still could provide a windfall for hiring certain employees, because the credit is more potent than a mere deduction.
Target Groups
The target groups that the credit can be taken on included the following 10 categories:
TARGET GROUP |
DEFINITION |
| Qualified IV-A Recipient | An individual who is a member of a family receiving assistance under a state plan approved under part A of title IV of the Social Security Act relating to Temporary Assistance for Needy Families (TANF). The assistance must be received for any 9-month period during the 18-month period ending on the hiring date. |
| Qualified Veteran | A qualified veteran is a veteran who is any of the following:
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| Ex-Felon | A qualified ex-felon is a person hired within a year of:
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| Designated Community Resident | A DCR is an individual who, on the date of hiring
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| Vocational Rehabilitation Referral | A vocational rehabilitation referral is a person who has a physical or mental disability and has been referred to the employer while receiving or upon completion of rehabilitative services pursuant to:
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| Summer Youth Employee | A qualified summer youth employee is one who:
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| Supplemental Nutrition Assistance Program (SNAP) Recipient | A qualified SNAP benefits recipient is an individual who on the date of hire is:
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| Supplemental Security Income (SSI) Recipient | An individual is a qualified SSI recipient if a month for which this person received SSI benefits is within 60 days of the date this person is hired. |
| Long-Term Family Assistance Recipient | A long term family assistance recipient is an individual who at the time of hiring is a member of a family that meets one of the following conditions:
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| Qualified Long-Term Unemployment Recipient | A qualified long-term unemployment recipient is one who has been unemployed for not less than 27 consecutive weeks at the time of hiring and received unemployment compensation during some or all or the unemployment period. |
Claiming the Credit
To claim the credit, the employer needs to obtain certification that the employee is part of a targeted group. This is done with Form 8550 and this should be filed with the applicable state/local agency within 28 days of employment. From there (assuming the employee is certified) the credit is claimed on the income tax return of a taxable employer on Forms 5884 and 3800. The credit is limited to the business income tax liability of the employer and any excess is subject to carryforward and carryback rules.
Tax-exempt employers instead use Form 5884-C following the filing of Form 8550, and the credit is limited to Social Security taxes otherwise owed (for all employees – not just the ones qualifying for the credit) for the period the credit is claimed.
Conclusion
As it currently stands, this credit is set to expire December 31, 2025. This credit is often forgotten but can provide benefits to employers by simply obtaining certification and claiming it on the tax return. This is a credit that should be assessed annually and it might be worthwhile to include as part of the hiring process so the certification, if applicable, can be filed timely.
For more information or a discussion on how this may impact your bank, please contact Adam Aucoin or your BNN tax advisor.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.
