It’s going to cost your small business clients to hire this summer, but at least the wages are deductible on their annual returns. Even better, if they hire workers from one of several “target groups,” a portion of the wages may qualify for a special tax credit.
This credit, which has expired and been reincarnated several times, is currently known as the Work Opportunity Tax Credit (WOTC) and is available through 2019. In addition to the regular credit, a business may be eligible for a special “summertime” credit for hiring certain disadvantaged youths.
How does the credit work? Generally, it is equal to the worker’s first-year wages up to $6,000 if he or she works at least 400 hours during the year, for a maximum credit of $2,400 per worker. For disabled veterans, the credit may be claimed for the first $24,000 of wages, for a maximum credit of $9,600 per worker.
There is no limit on the number of credits a business can claim. For example, suppose your client hires five eligible workers this year who each qualify for a $2,400 credit, As a result, the business may claim a total credit of $12,000 – a dollar-for-dollar reduction of its 2018 tax bill.
Currently, there are nine target groups eligible for the regular WOTC. The latest category to be added, effective January 1, 2016, covers long-term unemployment recipients who had been unemployed for a period of at least 27 weeks and have received state or federal unemployment benefits during part or all of that time.
The other categories include certain veterans and recipients of various kinds of public assistance, among others. The complete list is as follows:
Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
Unemployed veterans, including disabled veterans
Designated community residents living in Empowerment Zones or Rural Renewal Counties
Food stamp (SNAP) recipients
Supplemental Security Income (SSI) recipients
Long-term family assistance recipients
Qualified long-term unemployment recipients
The icing on the cake is that a business may also claim the summertime credit for hiring youths aged 16 or 17 who reside in an empowerment zone or enterprise community. This credit is equal to 40% of the first-year wages of $3,000, up to a maximum of $1,200, for someone working at least 400 hours. But the credit is limited to wages paid for services performed between May 1 and September 15.
Is that all there is to it? Not quite. An employer must obtain certification that an individual is a member of the targeted group before it can claim the WOTC for him or her.
Employers are instructed by the IRS to file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work.
Bottom line: Help your clients navigate these tricky tax waters. The payoff for hiring workers this summer will be well worth the time and effort.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...