June 2010

Work Opportunity Tax Credit
By Ann E. Woolum, CPA/ABV, CBA

        The Work Opportunity Tax Credit (WOTC) is a federal tax credit incentive that is available to businesses for hiring individuals from twelve target groups who have consistently faced significant barriers to employment. The main objective of the program is to enable the targeted employees to gradually move from economic dependency into self-sufficiency as they earn a steady income and become contributing taxpayers. At the same time, the participating employers are compensated by being able to reduce their federal income tax liability.

        The twelve target groups include: 1) qualified veterans, 2) members of a family that receives Temporary Assistance to Needy Families (TANF), 3) qualified food stamp recipients, 4) designated community residents, 5) vocational rehabilitation referrals, 6) qualified ex-felons, 7) supplemental security income (SSI) recipients, 8) qualified members of families in the Supplemental Nutritional Assistance Program (SNAP), 9) long-term family assistance recipients, 10) qualified summer youth employees, 11) unemployed veterans, and 12) disconnected youth.

        The WOTC for hiring most target group members range from $1,200 to $9,000, depending on the target group. There is a minimum employment or retention period. Most target groups must work a minimum of 120 or 400 hours. The WOTC amount an employer may claim depends on the hours the employee works. The credit is 25% of qualified first-year wages for those employed at least 120 hours but fewer than 400 hours and 40% for those employed 400 hours or more. Generally, the employer can take into account up to $6,000 of first year wages per employee ($10,000 for “long-term family assistance recipient”; $12,000 for certain veterans).

        In order for an employer to participate in the WOTC, the employer must obtain a certification that a new employee qualifies. An IRS Form 8850 must be completed when an individual is hired along with Department of Labor, Employment & Training Administration (ETA) Form 9061 and be mailed to the employer’s state workforce agency within 28 days after the employee’s employment start date.

        The Hiring Incentives to Restore Employment Act (HIRE) available beginning in 2010 allows an employer to claim a payroll tax holiday and an up-to-$1,000 tax credit. An employer may elect not to have the payroll tax holiday apply. Unless the employer elects out of the HIRE payroll tax holiday, wages paid to a qualified individual during the one-year period beginning on the date of hire will not qualify for the WOTC.

        Be aware that there are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of the credit. Please contact our office if you have any questions or need additional information.