An Overlooked Benefit: The Work Opportunity Credit

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In the midst of what seems like a never-ending wave of tax law changes, potential changes, and other planning it can sometimes be easy to overlook credits and tax incentives that have been around for a while but may not have annual applicability. In that vein, let’s look at a credit that can sometimes be forgotten, but can provide employers a nice benefit in their hiring practices. It could also help expand a potential employer’s field of employees in a competitive job market.

The Basics

The goal of the Work Opportunity Tax Credit (WOTC) is to encourage employers to hire individuals from specific targeted groups that historically have faced challenges to gaining employment. The credit is administered jointly by the Internal Revenue Service and Department of Labor. It becomes available for employers who hire employees that are certified by an applicable local agency as members of eligible target groups . Taxable employers will claim the credit on their income tax returns while tax-exempt employers will claim the credit against their payroll taxes.

The credit equals 40% of the wages paid (up to $6,000 for many targeted groups, up to $24,000 for certain qualified veterans, and up to $1,200 for summer youth employees). The credit rate is reduced to 25% for employees who perform fewer than 400 but have at least 120 hours of service for the employer. The credit is 50% of second year wages for long-term family assistance recipients. For example, an employee in the first target group shown in the chart below who earned wages of $6,000 would generate a credit of $2,400. Like a number of other tax credits, some rules designed to prevent double-dipping will force a for-profit taxpayer to reduce its wage deduction by the amount of the credit. For instance, a C Corp employer that generates a $2,400 credit will achieve a true benefit (ignoring any potential state tax effect) of $1,896 ($2,400 – (2,400 * 21%)) due to the “lost” deduction. So while this credit likely won’t be an end all be all for a financial institution, it still could provide a windfall for hiring certain employees, because the credit is more potent than a mere deduction.

Target Groups

The target groups that the credit can be taken on included the following 10 categories:

TARGET GROUP

DEFINITION
Qualified IV-A Recipient An individual who is a member of a family receiving assistance under a state plan approved under part A of title IV of the Social Security Act relating to Temporary Assistance for Needy Families (TANF). The assistance must be received for any 9-month period during the 18-month period ending on the hiring date.
Qualified Veteran A qualified veteran is a veteran who is any of the following:

  • A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least 3 months during the first 15 months of employment.
  • Unemployed for a period totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period ending on the hiring date.
  • Unemployed for a period totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date.
  • A disabled veteran entitled to compensation for a service-connected disability hired not more than one year after being discharged or released from active duty in the U.S. Armed Forces.
  • A disabled veteran entitled to compensation for a service-connected disability who is unemployed for a period totaling at least six months (whether or not consecutive) in the one-year period ending on the hiring date.
Ex-Felon A qualified ex-felon is a person hired within a year of:

  • Being convicted of a felony or
  • Being released from prison, after serving time for the felony
Designated Community Resident A DCR is an individual who, on the date of hiring

  • Is at least 18 years old and under 40,
  • Resides within one of the following:
    • An Empowerment zone
    • An Enterprise community
    • A Renewal community
  • AND continues to reside in one of the locations after employment.
Vocational Rehabilitation Referral A vocational rehabilitation referral is a person who has a physical or mental disability and has been referred to the employer while receiving or upon completion of rehabilitative services pursuant to:

  • A state plan approved under the Rehabilitation Act of 1973 OR
  • An Employment Network Plan under the Ticket to Work program, OR
  • A program carried out under the Department of Veteran Affairs.
Summer Youth Employee A qualified summer youth employee is one who:

  • Is at least 16 years old, but under 18 on the date of hire or on May 1, whichever is later, AND
  • Is only employed between May 1 and September 15 (was not employed prior to May 1) AND
  • Resides in an Empowerment Zone (EZ), enterprise community or renewal community.
Supplemental Nutrition Assistance Program (SNAP) Recipient A qualified SNAP benefits recipient is an individual who on the date of hire is:

  • At least 18 years old and under 40, AND
  • A member of a family that received SNAP benefits for:
    • the previous 6 months OR
    • at least 3 of the previous 5 months.
Supplemental Security Income (SSI) Recipient An individual is a qualified SSI recipient if a month for which this person received SSI benefits is within 60 days of the date this person is hired.
Long-Term Family Assistance Recipient A long term family assistance recipient is an individual who at the time of hiring is a member of a family that meets one of the following conditions:

  • Received assistance under an IV-A program for a minimum of the prior 18 consecutive months; OR
  • Received assistance for 18 months beginning after 8/5/1997 and it has not been more than 2 years since the end of the earliest of such 18-month period; OR
  • Ceased to be eligible for such assistance because a Federal or State law limited the maximum time those payments could be made, and it has been not more than 2 years since the cessation.
Qualified Long-Term Unemployment Recipient A qualified long-term unemployment recipient is one who has been unemployed for not less than 27 consecutive weeks at the time of hiring and received unemployment compensation during some or all or the unemployment period.

 

Claiming the Credit

To claim the credit, the employer needs to obtain certification that the employee is part of a targeted group. This is done with Form 8550 and this should be filed with the applicable state/local agency within 28 days of employment. From there (assuming the employee is certified) the credit is claimed on the income tax return of a taxable employer on Forms 5884 and 3800. The credit is limited to the business income tax liability of the employer and any excess is subject to carryforward and carryback rules.

Tax-exempt employers instead use Form 5884-C following the filing of Form 8550, and the credit is limited to Social Security taxes otherwise owed (for all employees – not just the ones qualifying for the credit) for the period the credit is claimed.

Conclusion

As it currently stands, this credit is set to expire December 31, 2025. This credit is often forgotten but can provide benefits to employers by simply obtaining certification and claiming it on the tax return. This is a credit that should be assessed annually and it might be worthwhile to include as part of the hiring process so the certification, if applicable, can be filed timely.

 

For more information or a discussion on how this may impact your bank, please contact Adam Aucoin or your BNN tax advisor.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.