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The Work Opportunity Tax Credit (WOTC) program, designed to encourage employers to hire and retain veterans and other people from groups with employment barriers, has a new lease on life.
President Barack Obama signed into law Dec. 18 an omnibus spending and tax package that retroactively reauthorized the tax incentive for employers from Jan. 1, 2015, and extended it through Dec. 31, 2019. This is the first time in several years that the WOTC program has been reauthorized for more than one year. Employers claim about $1 billion in tax credits each year under the program.
“WOTC is a win-win for employers and job seekers, as it lowers taxes and encourages” job creation, said Vaughn Hromiko, principal and director of client services at Sacramento, Calif.-based NorCal Tax Credit Advisors and RestaWOTC, specializing in WOTC services for restaurant groups.
The WOTC is a temporary provision of the Internal Revenue Code. Since its initiation in the mid-1990s, Congress has allowed the credit to lapse many times before reauthorizing it retroactive to its expiration date as part of large tax-related measures. The relatively short extensions of the program and its frequent expirations have caused frustration among employers that use the credit. “It expires. Congress renews it. Over and over again,” Hromiko said. “Extending WOTC through 2019 should help more employers than ever justify the costs and minor procedural changes required to enter the program.”
Society for Human Resource Management (SHRM) Senior Advisor for Government Relations Kathleen Coulombe said that “SHRM was pleased to see that not only was the Work Opportunity Tax Credit extended through 2019, but that it was expanded to include the long-term unemployed. This segment of the workforce is sometimes underutilized by employers, but can be instrumental in addressing skill shortages faced by employers.”
This may help counteract the phenomenon of unemployment bias, where qualified people are overlooked by employers merely because they currently don’t have a job, Hromiko said. “Where WOTC really shines, however, is in supporting jobs for military veterans and individuals with mental or physical disabilities,” he added.
How It Works
The amount of tax credit a company can generate under WOTC is based on the amount of wages it pays to each qualified worker, Hromiko said. “An employer can compensate its employees as much as it wants, however, the amount of wage used to calculate the tax credit is not unlimited,” he explained. “There is a cap for each qualifying employee, and that cap varies depending on why the employee qualified.”
In most cases, employers would be eligible for a 40 percent credit on the first $6,000 of wages paid to workers from nine target groups, for a maximum credit of $2,400 for each eligible employee. These groups include: unemployed and disabled veterans; recipients of Temporary Assistance for Needy Families, food stamps and Supplemental Security Income; residents of designated low-income communities; and ex-felons, among others.
A new category—the long-term unemployed—has been added to the program. Long-term unemployed recipients are defined as those who have been unemployed for at least 27 consecutive weeks and who received unemployment compensation. This new category is effective for employees who start work after Dec. 31, 2015.
“Managing the Work Opportunity Tax Credit program can be complicated,” said Jeanne Madden, vice president of operations in the Tax Credits Division of ADP Added value Services. “What many businesses don’t know is that they can qualify for a tax credit of up to $9,600 per eligible employee during the first year of employment through this program.”
There are a few eligibility categories for which the qualifying wage amount is capped at much higher than $6,000, Hromiko said. “The highest, or most valuable, credit is generated by the wages paid to a disabled veteran who was unemployed at least six months during the year prior to hire. In this case, the maximum credit is equal to 40 percent of the disabled veteran’s first $24,000 in wages if paid during the first 12 months of employment, equaling $9,600, which is the program’s largest tax credit benefit from a single employee’s wages.”
There is no limit on the number of individuals an employer can hire to qualify for the tax credit, and there are a few simple steps to apply.
*First employers complete Internal Revenue Service (IRS) Form 8850 when, or before, they make a job offer to an eligible worker. Employment and Training Administration Form(s) 9061/9062 must also be filled out and both forms sent to the state department of labor. You can find the WOTC coordinator in your state here. Employers must submit these forms within 28 days after the new hire starts work.
*Next, after receiving a certified application from the state workforce agency, employers must file IRS Form 5884/5884-c with the IRS to claim the tax credit. Before filing, the new hire must work for the company for at least 120 hours. After claiming the credit, employers should keep records for at least three years.
Roy Maurer is an online editor/manager for SHRM.
Follow him @SHRMRoy
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