February 20, 2020
- Potential Credit
- Eligible Employees
- Credit Determination
- Certification Process
- Other Issues
On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you.
Employers that hire disadvantaged individuals, such as unemployed veterans, SSI recipients, and ex-felons, among others, may benefit from a substantial federal tax credit. Hiring certain new employees can qualify the employer for the Work Opportunity Tax Credit (WOTC), which Congress extended for one additional year, so that it is now available for wages paid to eligible employees who begin work before January 1, 2021.
The WOTC is typically worth (i.e., reduces the employers’ tax by) up to $2,400 for each eligible employee, but it can be worth up to $9,600 for certain veterans and up to $9,000 for “long-term family assistance recipients.”
Generally, an employer is only eligible for the WOTC when paying qualified wages to members of any of the targeted groups listed below. For more details on the required qualifications for each group, see the instructions for IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit).
(1) Qualified IV-A recipients – generally, members of a family that is receiving assistance under the Temporary Assistance for Needy Families (TANF) program;
(2) Qualified veterans;
(3) Qualified ex-felons – generally, those hired within one year of their release;
(4) Designated community residents – those who are 18 through 39 years old who are living in an empowerment zone or a rural renewal area*;
(5) Vocational rehabilitation referrals – handicapped individuals who are referred by rehabilitation agencies;
(6) Qualified summer youth employees – those who are 16 or 17 years old, have never previously worked for the employer, and reside in an empowerment zone*;
(7) Qualified members of families who participate in the Supplemental Nutritional Assistance Program (SNAP);
(8) Qualified Supplemental Security Income recipients;
(9) Qualified long-term family assistance recipients – those receiving TANF assistance payments; and
(10) Qualified long-term-unemployed individuals.
* Both empowerment zones and rural renewal areas are listed in IRS Form 8850’s instructions.
For an employer to qualify for the credit, the employee must work at least 120 hours in the first year and receive at least 50% of his or her wages from that employer for working in the employer’s trade or business. Relatives of the employer as well as employees who have previously worked for the employer do not qualify for the credit.
For most employees from the targeted groups, the credit is based on the first $6,000 of first-year wages. If an employee completes at least 120 hours but less than 400 hours of service for the employer, the credit is equal to those wages multiplied by 25%. If the employee completes 400 or more hours of service, the credit is equal to the employee’s wages multiplied by 40%. Thus, the maximum credit per employee in one of these groups would be $2,400 (.4 x $6,000). For summer youth employees, only the first $3,000 of first-year wages counts, resulting in a maximum per-employee credit of $1,200 (.4 x $3,000)
Higher first-year wages are used when calculating the credit for employees in the following categories:
- Long-term family assistance recipients – For an employee in this category, the first-year wages that can be taken into account for the credit are increased to $10,000. This would result in a maximum credit of $4,000 (.4 x $10,000). In addition, employees in this group qualify the employer for a credit in their second year (immediately following the first year) equal to 50% of second-year wages, up to $10,000.
- Veterans – The three possible qualifications for veterans have applicable first-year wages for the credit of up to $12,000, $14,000, and $24,000. Thus, the maximum credit for this group is between $4,800 (.4 x $12,000) and $9,600 (.4 x $24,000), depending upon the qualification.
Certification Process – To be eligible to claim the WOTC, the employer must file Form 8850 with its state workforce agency no later than 28 days after an eligible employee begins work. Once the worker is state-certified as a member of a targeted group and has worked sufficient hours, the employer can claim the WOTC on Form 5884 (Work Opportunity Credit).
- No Dual Benefits – The employer may not claim a deduction for the portion of wages equal to the WOTC for that tax year.
- Unused Current-Year Credit – The credit is included in the general business credit. If an employer’s credit is greater than its income-tax liability (including the alternative minimum tax), the excess credit is considered an unused credit that is available for use on another year’s return. The unused credit is first carried back one year (generally by amending the return for the carryback year) and then carried forward until any remaining credit is used up (but for no more than 20 years).
In some circumstances, electing not to claim the credit will be more beneficial for the employer. If you are an employer and would like additional information related to the WOTC and to see if it would be beneficial in your particular tax circumstances, please contact us.