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Are you hiring? You may be entitled to federal tax credits

By Daryl L. Staley, CPA, MBA
Tax Manager

The Work Opportunity Tax Credit (WOTC) is a federal credit that employers can take advantage of to reduce their federal income tax liability. The tax credit was created to incentivize employers to hire people who typically experience certain barriers to employment, such as veterans, public assistance recipients, or ex-felons. The credit also applies when hiring individuals who have been unemployed long-term.

The tax benefit varies from $1,200 - $9,600 (25%-40% of the new qualified employee’s first-year wages) per employee depending on: worker category, wages earned, and number of hours worked in the first year.

Wages that can be used for credit calculation per employee based on People Group Category:

  • $3,000- Summer Youth Employee
  • $6,000- Long Term Unemployed (27 consecutive weeks in which all or part of that period they received unemployment compensation), Ex-Felons, other targeted groups
  • $6,000- Qualified Veteran as a member of a family receiving SNAP assistance or unemployed for four weeks – six months in the 1-year period ending on the hiring date
  • $12,000- Qualified Veteran entitled to compensation for a service-connected disability and hired not more than one year after being discharged/released from active duty
  • $14,000- Qualified Veteran unemployed for at least six months (whether consecutive or not) in in the one year period ending on the hiring date
  • $24,000 Qualified Veteran entitled to compensation for a service-connected disability and unemployed for a period or periods totaling at least six months (whether consecutive or not) in in the one year period ending on the hiring date

Credit calculation:

  1. Add wages paid to qualified People Groups keeping in mind max wages per employee based on categories above
  2. Multiply wages paid by 25% if employees worked between 120-399 hours in the first year
  3. Multiply wages paid by 40% if employees worked more than 400 hours in the first year
  4. Add #2 and #3 for the total credit amount
  • Example: “Company A” hired and paid: a “Summer Youth Employee” $1,296 who worked for 108 hours, a “Long Term Unemployed” employee $4,560 who worked for 380 hours, and a “Qualified Veteran unemployed for at least six months” $28,000 who worked for 2,000 hours. The WOTC Credit = $1,296 x 0% (Summer Youth did not work at least 120 hours) + $4,560 x 25% (25% because worked less than 400 hours) + $14,000 x 40% (Qualified Veteran of that category max qualified wages equals $14,000) = $6,740

Five steps to apply for the WOTC:

  1. Fill out IRS Form 8850 to prescreen employees
  2. Complete ETA Form 9061, which lists the individual characteristics of the work
  3. Submit all forms to the state workforce agency within 28 days after employee’s start date
  4. Receive a determination from the state (on average 10 -12 months response)
  5. Claim your credit by filing IRS Form 5884
    1. Must wait until eligible employee works at least 120 hours in the first year
       

There is a deadline to apply for the credit based on the employee’s hire date, so don’t delay. To see if you qualify or discuss the steps you should take before hiring, please contact Daryl Staley or Laura Stover.

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