Using the Work Opportunity Tax Credit

Among the business related provisions of the American Taxpayer Relief Act of 2013, the work opportunity tax credit (WOTC) was extended retroactively, for 2012, and also through 2013. Under the WOTC, employers can receive federal tax credits for hiring and retaining workers from specific groups of individuals that have been designated as facing significant barriers to employment.

Taking credit

If your company hires a worker covered by the WOTC, the tax credit you can claim will depend on the target group of the individual, the amount you pay him or her for the first year of employment, and the number of hours that individual worked. Here are the basic rules. If an employee works at least 120 hours, you can claim a tax credit of 25% of the individual’s first year wages. at least 400 hours, you can claim a tax credit of 40% of the individual’s first year wages. Generally, the maximum tax credit is $2,400. That ceiling applies if you hire food stamp recipients, certain residents of a federally designated Enterprise Community, Renewal Community, Rural Renewal County or Empowerment Zone, individuals in certain vocational rehab programs, ex-felons, or recipients of Supplemental Security Income benefits. If you hire a qualified summer youth employee (i.e., a 16 or 17-year-old who lives in an Empowerment Zone, an Enterprise Community, or a Renewal Community) to work for your company between May 1 and September 15, the maximum tax credit is $1,200. As explained in the following paragraphs, two other categories of employees have higher maximum WOTC credits.

Hiring veterans

You may be able to claim the WOTC if your company hires a veteran who served on active duty (not including training) in the U.S. Armed Forces for more than 180 days or has been discharged or released from active duty because of a service related disability. That person must not have been on active duty (not including training) for more than 90 days within the 60- day period before being hired. To get the tax credit, your company must hire a veteran who meets certain other criteria, such as being a member of a family receiving food stamps, having a service related disability, or having a lengthy period of unemployment. The maximum WOTC is $2,400 for hiring a qualified veteran unemployed for at least 4 weeks but less than 6 months during the 1-year period ending on the hiring date. The maximum credit is increased to $5,600 for hiring a qualified veteran unemployed for at least 6 months or more during the 1-year period ending on the hiring date. For hiring a veteran who has been on food stamps for at least a 3-month period ending during the 12-month period ending on the hiring date, the maximum credit is $2,400. Special rules apply to veterans entitled to compensation for a service related disability. If such a veteran is hired by your company within 1 year of leaving the service, your company can receive a tax credit up to $4,800. If such a veteran was unemployed for at least 6 months during the 1-year period ending on the date of hiring, you can receive a credit up to $9,600.

Hiring members of needy families

 Temporary Assistance to Needy Families (TANF) is a federal program. If you hire a short-term TANF recipient—any member of a family that received TANF benefits for 9 of the 18 months before being hired— the maximum WOTC is $2,400. Your company also can hire a long-term TANF recipient. That’s someone from a family meeting any of the following conditions: The family received TANF benefits during the 18 month period ending on the hiring date. The family received TANF benefits for at least 18 months after August 5, 1997. The employee’s hiring date must be no more than 2 years after the earliest 18-month period. The family stopped being eligible for TANF payments during the past two years because a federal or state law limited the time those payments could be made. If your company hires an employee from the long-term TANF group, it can take the WOTC over two years. If the individual works at least 120 hours in the first year, the employer may claim a tax credit equal to 40% of first-year wages. If the individual works at least 400 hours in the second year, the employer may claim a tax credit equal to 50% of second-year wages. Companies that hire long-term TANF recipients can take a WOTC up to a total of $9,000, over those two years. To apply for the WOTC, your company must fill out and submit several IRS and Labor Dept. forms.

Copyright AICPA

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