The Work Opportunity Tax Credit is Back

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The Work Opportunity Tax Credit is Back

The Work Opportunity Tax Credit is Back

The Work Opportunity Tax Credit is Back

Calling all Doctors, Dentists, Therapists, Chiropractors, Lawyers, Healthcare Professionals, E-commerce owners, Amazon DSP owners, ....Good News!

Work Opportunity Tax Credit ("WOTC") till December 31, 2025

The Consolidated Appropriations Act of 2021 has now extended the Work Opportunity Tax Credit ("WOTC") till December 31, 2025. So what does this mean for you? If you are hiring, be sure to use form 8850 "Pre-Screening Notice and Certification Request for the Work Opportunity Credit". You can give this form to potential new hires to complete when they apply for a job. If you hire someone that completes this form, the next step is to submit it to your local designated agency and get the certification. This has to be done within 28 days of hire, but if you didn't do that in 2021 already, because you were under the impression that the credit expired in 2020, now's the time to get it done.

The WOTC can offer employers a tax credit of up to 50% of qualified wages. The following are targeted groups that the WOTC applies to:

  • Qualified IV-A Recipient
  • Qualified Veteran
  • Ex-Felon
  • Designated Community Resident
  • Vocational Rehabilitation Referral
  • Summer Youth Employee
  • SNAP recipient
  • Long-term Family Assistance Recipient
  • Qualified Long-Term Unemployment Recipient

See https://www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit for more information on the WOTC, as this newsletter doesn't present all the data related to this tax topic.

But before you do that….check out the below info:

Background

The WOTC was created in 1996. Three-quarters of the program's beneficiaries are Supplemental Nutrition Assistance Program (also known as food stamps) recipients, based on DOL data. Other eligible worker categories include:

  • Unemployed or disabled military veterans.
  • Long-term unemployed.
  • Temporary Assistance for Needy Families (TANF) recipients.
  • Residents living in designated economically struggling communities.
  • People with disabilities who have completed or are completing vocational rehabilitation
  • People with criminal histories
  • Supplemental Security Income recipients.
  • Teens from designated empowerment zones employed for summer work.

Both for-profit and nonprofit employers are eligible for WOTC. The difference comes down to how the credits are applied and the worker categories available. All categories are available for private-sector employers, and any earned credits can be applied to either their corporate or personal federal tax liability, depending on the type of tax return you file. Tax-exempt employers can access the program if they hire veterans and can use the credit against the employer's share of Social Security tax. Veteran credits are some of the higher-value credits, so it's a great opportunity for employers.

The exact tax benefit amount that a business can receive depends on several factors, including the worker category, the employee's salary and the number of hours the employee worked in the first year.

It's important to note that the same wages used to calculate WOTC cannot be used to calculate other credits, such as the Employee Retention Tax Credit, Employer Paid Family and Medical Leave Credit, other disaster retention credits, or forgivable Paycheck Protection Program loan proceeds.

The Importance of Screening Applicants

Aiming to screen all applicants for WOTC eligibility is essential. The trick is to screen early and complete the screening for 100 percent of the new hires in order to better understand the candidate pool and the credit potential.

Data from Equifax Workforce Solutions show that nationally, somewhere between 20 to 30 percent of a company's employee base could possibly qualify for WOTC. Integrating screening software into an applicant tracking system to quickly identify WOTC eligible candidates can be very useful, experts agreed.

How to Apply for WOTC

The application process involves five steps. Prior to claiming the tax credit with the IRS, an employer must first request and receive certification from its state workforce agency stating that the new hire is a member of at least one of the WOTC target groups. Since the required forms change periodically, ensure that you submit the approved version of the form.

The top reasons for application denials are a lack of proper documentation and workers being deemed ineligible for the credit, according to the IRS.

So here’s the 411 on the process:

  1. Fill out IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to prescreen employees, and submit a written request to certify a new hire as a member of a WOTC target group. Job applicants provide this information to the employer or complete the screening information via an automated service on or before the day a job offer is made.
  2. Complete ETA Form 9061, the Individual Characteristics Form, which lists the individual characteristics of the worker. Identification documentation may be needed, such as the applicant's driver's license to prove residence, a DD-214 to prove veteran status or a TANF case number.
  3. Submit all forms to your state workforce agency within 28 calendar days after the employee's start date. WOTC applications that are not submitted within 28 calendar days may be denied, but certain exemptions are in effect due to COVID-19 protocols and the fact that WOTC was just reinstated late in 2021.
  4. Receive a determination. The state workforce agency will issue a final determination for each WOTC application. When a certification is received, then the employer can claim the tax credit with the IRS.
    The time it takes to receive a determination can vary greatly and the average time is between 10 and 12 months. Some states have electronic submission systems and some don't, but the review process itself is still manual, so that takes time.
  5. Claim your credit. Generally, an employer elects to take the credit by filing IRS Form 5884, Work Opportunity Credit. However, a tax-exempt organization that hires an employee in the WOTC veteran target group should use IRS Form 5884-C.
    Remember, employers must wait until eligible employees work at least 120 hours in the first year of employment before filing and qualifying for the tax credit.

Remember, employers must wait until eligible employees work at least 120 hours in the first year of employment before filing and qualifying for the tax credit

The Accounting Solution to present the WOTC Tax Credit forms with your Annual Business Tax Returns

If you or someone you know is contemplating to present the WOTC, Interactive Accountants can assist you in preparing the WOTC tax credit forms with your annual business tax returns, should your company be eligible. So give us a call or schedule a free consultation with our owner Matthew Shiebler, CPA. He’s been practicing accounting for over 25 years now and is a business owner, just like you!