The Taxpayer Certainty and Disaster Tax Relief Act of 2019 extended the Work Opportunity Tax Credit (WOTC) allowing employers who are willing to help disadvantaged individuals to benefit from a substantial federal tax credit.
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 is available for eligible employees who begin working for the new employer before January 1, 2021.
Generally, an employer is eligible for the WOTC only when paying qualified wages to members of any 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 who are aged 18 through 39 and who are living in an empowerment zone or a rural renewal area*;
(5) Vocational rehabilitation referrals – handicapped individuals who are referred by rehabilitation agencies;
(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.
* Both empowerment zones and rural renewal areas are listed in the IRS Form 8850 instructions. The empowerment zone designations expired at the end of 2017. However, the legislation that extended the WOTC through 2020 also provides for an extension of the designations to the end of 2020.
For an employer to qualify for the credit, the employee must work a minimum of 120 hours and receive at least 50% of his or her wages from that employer for working in the employer’s 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 of the 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 is equal to those wages multiplied by 25%. If the employee completes 400 or more hours of service, 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:
- – 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.
- – The three possible qualifications of veterans 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.
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 has extended many filing due dates, including if the 28th calendar day falls on or after April 1, 2020, and before July 15, 2020; in that case, employers are allowed to submit Form 8850 to the SWA by July 15, 2020. Once the worker is state-certified as a member of a targeted group and has worked sufficient hours, the employer can claim the WOTC on Form 5884 (Work Opportunity Credit).
- No Dual Benefits – No deduction is allowed for the portion of wages equal to the WOTC for that tax year.
- Unused Current-Year Credit – The credit is included in the general business credit, and if an employer’s credit is greater than its income-tax liability (including the alternative minimum tax), the excess credit is considered an unused credit that is available for use on another year’s return. The unused credit is first carried back one year (generally by amending the return for the carryback year) and then carried forward until any remaining credit is used up (but for no more than 20 years).
In some circumstances, electing not to claim the credit is more valuable tax-wise for the employer.