This is article number two in our series of Tax Credits. The first article can be found here.
Code Section – 51
Expiration Date – Hired on or before 12/31/2011
Allowable Entities – Any private or for-profit business
Form to claim credit – 5884
Type of Tax Offset – Regular federal tax, non-refundable
AMT Limitation – None
The Work Opportunity Tax Credit (WOTC) was a federal tax credit designed as an incentive to employers to hire individuals in certain targeted groups. These groups have consistently experienced high rates of unemployment due to a variety of employment barriers. The WOTC applies only to new employees and only first-year wages. The new employee may not have worked for the hiring employer anytime in the past and may not be a relative, dependent or a majority owner of the business.
The WOTC reduces the employer’s wage deduction dollar-for-dollar. The credit is reported on Form 5884 for any private or for-profit business. However, an employer can elect not to take the WOTC by not claiming the credit at any time before the expiration of the three year period. This election can be made or revoked by filing an amended return and claiming the credit on the amended return within the three year period.
For eligibility of the WOTC, a new employee must be certified as a member of a targeted group by the Missouri Department of Economic Development through the Division of Workforce Development. For certification, the employer must follow the steps below:
- Complete page one of the Pre-Screening Notice and Certification Request (Form 8850) WOTC Forms, Employment & Training Administration (ETA) – U.S. Department of Labor by the day the job offer is made
- Complete page two of the Pre-Screening Notice and Certification Request (Form 8850) after the individual is hired
- Complete one of the following U.S. Department of Labor forms:
- a). Individual Characteristics Form (ETA Form 9061) WOTC Forms, Employment & Training Administration (ETA) – U.S. Department of Labor, if the new hire has not been given a Conditional Certification (ETA Form 9062), or
- b). Conditional Certification Form (ETA Form 9062) bottom section, if the new hire has already been conditionally certified as belonging to a WOTC target group by a state workforce agency.
4. Mail the signed/dated forms to the Missouri Department of Economic Development WOTC Coordinator not later than 28 calendar days after the new hire begins work.
Target Groups Include:
- Long-term TANF (temporary assistance to needy families) recipient or Beyond Welfare program recipient
- Other TANF recipient
- 18-39 year old SNAP (food stamps) recipient
- 18-39 year old designated community resident – limited rural counties in Missouri (Atchison, Carroll, Chariton, Clark, Holt, Knox, Mississippi, New Madrid, Pemiscot and Worth)
- Vocation rehabilitation referral
- Supplemental Security Income (disability) recipient
For more details on each group, click here: WOTC Eligible New Hires.
There is no limit on the number of qualifying new hires per business. The WOTC is based on qualified wages paid to the employee for the first year of employment. Generally, qualified wages are capped at $6,000 (exception includes disabled veterans $12,000). Qualified wages exclude wages paid under a federally funded on-the-job training program, work supplementation payments under Section 482(e) and wages paid to employees in strike replacement positions.
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. The maximum credit per employee is $2,400 for each new hire or $4,800 for each new disabled veteran hire. The WOTC can offset 100% of AMT liability (IRC Sec. 38 ( c )(4)(B)). Any unused portion of the credit can be carried back one and forward 20 year (IRC Sec. 39(a)(1)). If any of the credit remains unused, it normally can be deducted in the 21st year (IRC Sec. 196).
For the Long-Term TANF recipient or Beyond Welfare Program recipient the wages are capped at $10,000. These recipients are also available for the employee’s qualified second-year wages, capped at $10,000. The calculation for this group is 40% of qualified first-year wages and 50% of qualified wages for the second-year of employment.
Please contact us if you have any questions about the Work Opportunity Tax Credit.