The Bottom Line: Hiring Tax Incentives
Bengi Bala, CPA, CIT, Mueller Prost LC
The Work Opportunity Tax Credit (WOTC) is a voluntary employment tax incentive program sponsored by the federal government since 1978. The Protecting Americans from Tax Hikes (PATH) act of 2015 extended the WOTC for employers hiring qualified individuals who began work for an employer before January 1, 2020. Each year, employers claim more than $1 billion in tax credits under the WOTC program. There are a number of targeted groups within the WOTC tax credit incentive program.
Employers who meet the criteria receive a federal income tax credit of a maximum of $2,400 or $9,600 per employee, depending on the target group, as listed below. This reduces their federal income tax liability. Tax credits are more valuable than tax deductions, as they are a dollar-for-dollar offset against the employer’s federal income tax liability. The credit is not refundable. That is, the company must be profitable to use the income tax credits. However, any unused credits must first be carried back one
year on an amended tax return, and then the remainder, if any, must be carried forward 20 years.
The program is intended to increase opportunities for those potential workers who face certain barriers to employment. This includes people receiving public assistance or food stamps, living in areas of high unemployment or, more commonly, people with military experience. With a large number of individuals leaving the military and entering the workforce, military veterans represent a significant portion of the groups targeted by the WOTC.
In order for the employer to obtain the tax credit, the employee must complete at least 120 hours of work. A partial credit is available to those with employees who work at least 120 hours but fewer than 400.
Employers that hire from the following targeted groups may qualify for the WOTC:
1. Unemployed veterans (including disabled veterans)
2. Temporary Assistance for Needy Families (TANF) recipients
3. Supplemental Nutrition Assistance Program (SNAP) recipients
4. Residents of designated communities (Empowerment Zones or Rural Renewal Counties)
5. Individuals referred by vocational rehabilitation programs
7. Supplemental Security Income recipients
8. Summer youth employees (who live in Empowerment Zones)
Each of these categories has its own qualifying criteria that must be met before starting the WOTC application process.
Utilizing the Credit
The WOTC is one of many general business tax credits (GBC), which are limited to the company’s net regular tax in excess of its tentative minimum tax. That is, most credits may not offset the alternative minimum tax (AMT). Generally, a company subject to AMT in a given tax year will receive no current benefit from the GBCs. However, the Internal Revenue Code permits specified credits, including the WOTC, to offset both regular income tax and AMT. This is welcome relief, as many business owners of flow-through entities (S corporations, partnerships, limited liability companies and sole proprietorships) are subject to the AMT.
The hiring of certain individuals does not qualify the employer for the WOTC. Among those non-qualifying employees are relatives and majority owners of the business. The Internal Revenue Service has strict rules on nepotism. No WOTC tax credit can be claimed for wages paid to relatives employed by a taxpaying company. The Internal Revenue Code states that a “relative,” for tax credit purposes, is an individual who bears one of the following types of relationship to the employer: child or a descendant of a child; brother, sister, stepbrother or stepsister; father, mother or an ancestor of either; stepfather or stepmother; son or daughter of a brother or sister of the employer; brother or sister of the father or mother of the employer; or son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.
A new hire’s wages are also not qualifying for the tax credit if the employee bears any of the relationships described above or is an individual who owns, directly or indirectly, more than 50 percent of the value of the outstanding stock of the company employing him or her, or is an individual who owns, directly or indirectly, more than 50 percent of the capital and profits interests in the business.
Also, in terms of more distant relatives, the intent of the WOTC legislation was to help individuals with significant barriers to employment obtain work. If a distant relative could have been employed through their connections with the employer without the incentive of the tax credit, as the public might perceive, then taking advantage of the tax credit could be viewed as not meeting the intent of the law. As such, any dependent of the employer and member of the employer’s household is excluded.
Lastly, the WOTC cannot be claimed for wages paid to or incurred on behalf of employees for whom the employer is receiving federal job-training funding or work supplementation payments, and for retired employees. And, even if part or all of the WOTC is carried back or forward, the wage deduction for which the WOTC is claimed must be reduced by the full amount of the WOTC. For example, assuming a $10,000 WOTC is claimed, the company’s wage deduction must be reduced by this same amount.
Qualifying employees must complete IRS Form 8850 on or before starting the job, and the form must be sent to the state Department of Labor for certification, postmarked within 28 days of the employee’s start date.
The WOTC is yet another opportunity for mold builders to reduce their federal income tax liabilities. In addition to the federal WOTC, numerous states also have hiring incentives along with their own compliance requirements. Mold builders that develop processes to capture these credits as part of their hiring processes may be able to make a significant impact on their bottom line.
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