2020 may be a good year for hiring, since the Further Consolidated Appropriations Act extended the Work Opportunity Tax Credit (WOTC) through 2020. This federal income tax credit is available to businesses that hire members of certain “targeted” groups. Let’s examine how the credit can benefit your business.
Reviewing the basics
The WOTC encourages businesses to hire from certain categories of workers who face significant barriers to employment. The allowable credit amount is based on a portion of wages paid to an eligible worker during the first year of employment or, in some cases, during the first two years.
Businesses can claim the credit for eligible workers whose employment begins before January 1, 2021. It is important to note that the credit is available only for new hires. Wages paid to an individual who was previously employed by your business and is rehired do not qualify. And, wages paid to certain individuals who are related to the employer or business owner do not qualify.
Just a caution, there are limitations around receiving this credit. It is not available unless the worker completes at least 120 hours of work, and it is reduced if the individual works at least 120 hours but less than 400 hours. And a business cannot claim a compensation deduction for any portion of wages claimed as a WOTC.
Calculating the credit
The credit generally equals 40% of eligible wages paid to an employee during the first year of employment, up to a maximum of $6,000 of wages. That translates into a maximum credit of $2,400 per employee. First-year wages means eligible wages paid for services rendered during the one-year period beginning on the day the individual starts work for the employer.
However, there are several exceptions to this general rule. For example, the credit is different for qualified summer youth employees, long-term family assistance recipients and several categories of qualified veterans.
Other categories of WOTC-eligible workers under current law include:
- Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients;
- Designated community residents living in empowerment zones or rural renewal counties;
- Vocational rehabilitation referrals;
- Supplemental Nutrition Assistance Program (SNAP) recipients;
- Supplemental Security Income (SSI) recipients; and
- Qualified long-term unemployment recipients.
Individuals who are members of a targeted group generally must be certified by a designated local agency by the day the individual begins work or shortly thereafter. You will also need to submit additional forms to the Department of Labor.
Hiring those workers who are in the most need is a win for both the employee and your business. And qualifying for the WOTC is an added bonus. The paperwork can be a little overwhelming, so it is important to consult your ORBA tax professional for assistance.
For more information, contact Mark Thomson at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing & Distribution Group.