Passed by Congress at the very end of 2020, the Taxpayer Certainty and Disaster Relief Act included a provision that could make it easier to hire workers after the COVID-19 pandemic subsides.
The Act contained a five-year extension of the Work Opportunity Tax Credit (WOTC) that encourages businesses to hire individuals from certain target grouped that have traditionally faced employment barriers.
The WOTC extension could make hiring such workers more financially feasible. The maximum credit can range from $2,400 to $9,600 for each new hire, depending on which targeted group the employee qualifies under, the number of hours worked, and the wages earned during employment.
The WOTC is a nonrefundable credit. In other words, the amount you may claim in any given year is limited to the amount of your tax liability for that year. But any unused credit can be carried forward and applied to future tax bills for up to 20 years.
Qualified Targeted Groups
To qualify for the credit, employers must hire employees who are members of any of the following targeted groups:
- Members of families receiving Temporary Assistance for Needy Families (TANF) benefits
- Supplemental Nutrition Assistance Program (SNAP) recipients who meet specified age and other requirements
- Supplemental Security Income (SSI) recipients who received benefits within the 60 days of their hire date
- Long-term family assistance recipients who meet certain conditions
- Qualified recipients of long-term unemployment benefits
- Residents of designated Urban Empowerment Zones, Enterprise Communities, or Rural Renewal counties
- Qualified veterans (including disabled veterans) who meet certain income and unemployment requirements
- Ex-felons who are hired within a year of their release
- Individuals referred by approved vocational rehabilitation programs who meet certain disability qualifications
- Summer Youth Program employees living in Empowerment Zones
Varying age limitations, time restrictions, and other qualifications apply across the targeted groups. Websites for the IRS (https://www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit) and the U.S. Department of Labor (https://www.dol.gov/agencies/eta/wotc) offer more detailed information on the particular requirements for each group.
Time Limits to Qualify
The IRS and Labor Department administer the program jointly through designated state workforce agencies. In order to claim the WOTC, you first must obtain certification from the state agency that the worker qualifies as a member of a targeted group.
To get this certification, you and the employee must complete Form 8850, “Pre-Screening Notice and Certification Request,” and file the form with the designated state agency within 28 days of starting work. This means you cannot wait until tax season to start qualifying; the certification request must be submitted promptly.
There are other limitations as well. For example, the WOTC cannot be claimed for hiring dependents or relatives, for rehiring previous employees, or for any employee that does not complete at least 120 hours of work for the company after being hired. Note also that the wages you use to calculate the WOTC cannot be used to qualify for the Employee Retention Tax Credit, Employer-Paid Family and Medical Leave Credit, or Paycheck Protection Program loan forgiveness.
Probably the biggest change to the WOTC in the Taxpayer Certainty and Disaster Relief is a certainty. While previous extensions were for one year, the new legislation solidifies the tax credit until the end of 2025.
Few areas impact your business as much or directly as the tax code. Dembo Jones’ goal is to guide you through these complexities and constant changes to help you comply with your tax requirements while minimizing your tax liability. Our team of certified public accountants, tax attorneys, and certified financial planners take the time to understand your unique position and tax situation. Contact us today.