Work Opportunity Tax Credit – Timing is Everything

A recently extended tax credit could make it easier for some businesses to expand their payrolls again after the COVID-19 pandemic. The Taxpayer Certainty and Disaster Tax Relief Act, part of the 2021 appropriations bill that was signed into law on December 27, 2020, includes a five-year extension of the Work Opportunity Tax Credit (WOTC).

The WOTC is designed to encourage businesses (and non-profit entities) to hire individuals from certain targeted groups that have traditionally faced employment barriers. After many companies were forced to reduce their workforces significantly in 2020, the number of people who could qualify for one of these groups has grown, especially those who qualify as recipients of long-term unemployment benefits.

The WOTC extension could make hiring such workers more financially feasible. The maximum credit can range from $2,400 to $9,600 for each new hire, depending on which targeted group the employee qualifies under, the number of hours worked, and the wages earned during employment.

The WOTC is a nonrefundable credit. In other words, the amount you may claim in any given year is limited to the amount of your tax liability for that year. But any unused credit can be carried forward and applied to future tax bills for up to 20 years. Non-profit entities can use the credit to offset employer social security tax.

Qualified Targeted Groups

To qualify for the credit, employers must hire employees who are members of any of the following targeted groups:

  • Members of families receiving Temporary Assistance for Needy Families (TANF) benefits
  • Supplemental Nutrition Assistance Program (SNAP) recipients who meet specified age and other requirements
  • Supplemental Security Income (SSI) recipients who received benefits within the 60 days of their hire date
  • Long-term family assistance recipients who meet certain conditions
  • Qualified recipients of long-term unemployment benefits
  • Residents of designated Urban Empowerment Zones, Enterprise Communities, or Rural Renewal counties
  • Qualified veterans (including disabled veterans) who meet certain income and unemployment requirements
  • Ex-felons who are hired within a year of their release
  • Individuals referred by approved vocational rehabilitation programs who meet certain disability qualifications
  • Summer Youth Program employees living in Empowerment Zones

Varying age limitations, time restrictions, and other qualifications apply across the targeted groups. Websites for the IRS and the U.S. Department of Labor offer more detailed information on the particular requirements for each group.

Time Limits to Qualify

The IRS and Labor Department administer the program jointly through designated state workforce agencies. In order to claim the WOTC, you first must obtain certification from the state agency that the worker qualifies as a member of a targeted group.

To get this certification, you and the employee must complete Form 8850, “Pre-Screening Notice and Certification Request,” and file the form with the designated state agency within 28 days of starting work. This means you cannot wait until tax season to start qualifying; the certification request must be submitted promptly.

There are other limitations as well. For example, the WOTC cannot be claimed for hiring dependents or relatives, for rehiring previous employees, or for any employee that does not complete at least 120 hours of work for the company after being hired. Note also that the wages you use to calculate the WOTC cannot be used to qualify for the Employee Retention Tax Credit, Employer Paid Family and Medical Leave Credit, or Paycheck Protection Program loan forgiveness.

In previous years, the WOTC usually was included in a package of temporary one-year tax extenders passed at the end of the year. The new extension ends that uncertainty for a few years by continuing the program through December 31, 2025.

Please contact us to learn more about the Work Opportunity Tax Credit or any other available tax credits.