The Covid-19 pandemic has had a significant impact on the labor market – mandated government lockdowns and workers' and customers' fears of contracting the illness resulted in businesses closing or temporarily cutting back and laying off or furloughing millions of employees. In April 2020, the unemployment rate reached 14.8%, the highest rate since such data started being collected in 1948. While by September 2021, the unemployment rate had declined to 4.8%, millions of job openings went unfilled as former employees were reluctant to return to work. Some businesses still weren't operating at total capacity because they weren't able to find enough employees.
Suppose you are a business owner and are hiring new workers. In that case, you may be able to claim a Work Opportunity Tax Credit (WOTC) if you hire someone who has been unemployed for 27 consecutive weeks or more or if the individual is from one of several other categories of eligible employees as explained below. This credit is an income tax credit, unlike some of the pandemic-related credits applied to the business's employment taxes.
The WOTC is typically worth 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." The credit, which Congress extended in late 2020 legislation, is available for eligible employees who begin working for the new employer after 2020 and before 2026.
Generally, an employer is eligible for the WOTC only when paying qualified wages to members 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 release from prison;
(4) Designated community residents – those aged 18 through 39 and are living in an empowerment zone or a rural renewal area*;
(5) Vocational rehabilitation referrals – disabled individuals who rehabilitation agencies refer;
(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. The period of unemployment cannot be less than 27 consecutive weeks. They must include a period (less than 27 consecutive weeks) in which the individual received unemployment compensation under state or federal law.
* Both empowerment zones and rural renewal areas are listed in the IRS Form 8850 instructions. The empowerment zone designations expired at the end of 2020. However, the legislation that extended the WOTC through 2025 also extends the designations to the end of 2025.
For an employer to qualify for the credit, the employee must work a minimum of 120 hours and receive at least 50% of their wages from that employer for working in their trade or business. Relatives of the employer and employees who have previously worked for the employer do not qualify for the credit.
For an employee from most targeted groups, the credit is based upon 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 equals those wages multiplied by 25%. If the employee completes 400 or more service hours, the credit is equal to the wages multiplied by 40%. Thus, the maximum credit per employee in one of these groups would be $2,400 (.4 x $6,000). For the summer youth employees, only the first $3,000 of the first-year wages are taken into account, resulting in a maximum per-employee credit of $1,200 (.4 x $3,000)
Two categories allow for higher first-year wages to be eligible when calculating the credit:
Long-term family assistance recipients – For this category, the first-year wage that can be taken into account for the credit is increased to $10,000, thus allowing a maximum credit of $4,000 (.4 x $10,000). In addition, this group qualifies for a credit in the second year (immediately following the first year); this is equal to 50% of second-year wages up to $10,000.
Veterans – The three possible qualifications of veterans (family received SNAP benefits, unemployed, or service-related disability) have applicable first-year wages for the credit of up to $12,000, up to $14,000, and up to $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. The unemployment-based qualification for veterans without a service-related disability is either that the veteran was:
(1) Unemployed for a period or periods totaling at least four weeks (whether or not consecutive) but less than six months in the one year ending on the hiring date, or
(2) Unemployed for a period or periods totaling at least six months (whether or not consecutive) in the one year ending on the hiring date.
Certification Process - To be eligible to claim the WOTC, the employer must file Form 8850 with its state workforce agency (SWA) no later than 28 days after an eligible employee begins work. Due to the COVID-19 emergency, the IRS extended filing due dates, including if the 28th calendar day falls on or after January 1, 2021, and before October 9, 2021; in that case, employers are allowed to submit Form 8850 to the SWA by November 8, 2021. Once the worker is state-certified as a targeted group member and has worked sufficient hours, the employer can claim the WOTC on Form 5884 (Work Opportunity Credit).
No Multiple Benefits – No deduction is allowed for the portion of wages equal to the WOTC for that tax year. Also, the same wages used to compute the WOTC can't be used by the employer when claiming the coronavirus-related Employee Retention Credit, the credit for qualified sick and family leave, and the disaster-related employee retention credit.
Unused Current-Year Credit – The credit is included in the general business credit. Suppose an employer's credit is more significant than its income-tax liability (including the alternative minimum tax). In that case, the excess credit is considered an unused credit available for use on another year's return. The new credit is first carried back one year (generally by amending the return for the carryback year) and then moved forward until any remaining credit is used up (but for no more than 20 years).
If you are expanding your workforce as the pandemic winds down, be sure to keep in mind that you may be eligible to claim the WOTC for qualified employees from the targeted tax groups noted in this article. However, in some circumstances, electing not to claim the WOTC may be more valuable tax-wise for you. Please call this office for additional information related to the WOTC and see if it would benefit your particular tax circumstances.