The IRS is reminding taxpayers that time is running out on an expanded tax break for hiring veterans (IRS Special Edition Tax Tip 2012-14).
Under prior law, an employer could claim a Work Opportunity Tax Credit (WOTC) if it hired a qualified individual from one of eight "target groups." This includes certain needy individuals like food stamp recipients and others on public assistance. The amount of the credit is based on a percentage of qualified wages paid to the new hire during the first year of employment.
Generally, qualified wages are capped at $6,000 for this purpose. The WOTC is equal to 25 percent of qualified first-year wages for those employed at least 120 hours and 40 percent for those employed 400 hours or more. Therefore, the credit can reach as high as $2,400 per qualified worker (40 percent of $6,000) in most target groups. The WOTC, which has been extended several times in the past, technically expired on December 31, 2011, although it could be reinstated retroactive to January 1, 2012, and possibly extended again.
In the meantime, the VOW (Veterans Opportunity to Work) to Hire Heroes Act of 2011 expanded the credit for hiring qualified veterans who begin employment before January 1, 2013. Specifically, the VOW to Hire Heroes Act added two new categories to the targeted group for veterans and made the WOTC available to certain tax-exempt employers as a credit against its share of Social Security tax. It also increased the available credit for hiring qualified veterans.
The credit can be as high as $9,600 for each qualified veteran who is hired and $6,240 for those hired by tax-exempt organizations. The exact amount of the credit depends on a number of factors, including the length of the veteran's unemployment before hire, the number of hours the veteran works, and the veteran's first-year wages. Employers hiring veterans with service-related disabilities may be eligible for the maximum tax credit. Note that the amount of the credit for a tax-exempt organization can't exceed its Social Security tax for the period the credit is claimed.
All employers claiming the WOTC must obtain certification that a new hire is a member of the targeted group. The process for certifying veterans for the credit is the same for all employers. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with its respective state workforce agency within twenty-eight days after the eligible worker begins work.
The future fate of the WOTC, including the expanded tax breaks for hiring veterans, remains unclear. At this point, the only thing that is certain is that employers can still claim the credit under the VOW to Hire Heroes Act by hiring vets who start work before January 1, 2013.