Work Opportunity Tax Credit Basics

By October 1, 2009 Businesses

The Work Opportunity Tax Credit is a tax credit that you can receive for hiring workers belonging to targeted groups.  These groups include veterans, ex-felons, food stamp recipients, social security income recipients, vocational rehabilitation referrals, summer youth employees, disconnected youth, long-term family assistance recipients, IV-A recipients, and designated community residents.  Please contact me if you think you may have someone who fits one of these categories.

In most cases, the WOTC comes to 40% of the employee’s qualified wages for the first year of employment if they work at least 400 hours that year.  If they work at least 120 hours, but less than 400 hours, the credit is 25%.  The credit is limited to the first $6,000 of income, although there are exceptions that I will note later in this memo.  The wages subject to the credit cannot be claimed as a deduction on your tax return.

In order to qualify for the WOTC, you must fill out Form 8850 for the IRS (which has a portion for the employer and employee to fill out) and file for certification with your local agencies.  For Florida, the Form 8850 and Florida Form ETA-9061 must be completed and mailed to the Agency for Workforce Innovation in Tallahassee no later than 28 days after the employee’s start date.

Examples of WOTC Scenarios:

You hire Mr. Smith for $10 an hour.  Mr. Smith is an ex-felon and works for you for 700 hours this year, or 17 and a half weeks.  At the end of the year, you have paid him $7,000 in gross income.  The work opportunity credit comes to $2,400 (first $6,000 in wages x 40%).

Instead, you hire Mr. Smith for $10 an hour and he works 300 hours, or 7 and half weeks.  At the end of the year, you have paid him $3,000 in gross wages.  The total credit is $750 ($3,000 x 25% since he worked more than 120 hours, but less than 400).

Exceptions:

For qualified veterans, the wage limit is $12,000.  This means that your potential credit could be as much as $4,800.

For summer youth employees, the credit is 40% of wages paid during any 90 day period between May 1 and September 15 up to a maximum of $3,000 per employee.

Wages do not include amounts paid under federally funded on-the-job training programs, Social Security work supplement payments under section 482(e) of the Social Security Act, or wages paid to employees filling strike replacement positions.

Drawbacks:

Except in the case of a C-Corporation, the WOTC is taken on the personal income tax return of the owners of the company.  In other words, even if you hire someone to work for the first half of the year, you won’t be able to apply the credit until the following year when you file your corporate and personal income tax returns.

You must reduce your deduction for wages by the total amount of the credit.  If you pay someone $20,000 for the year and take the maximum credit of $2,400 (40% x the first $6,000 in wages), then on your company’s tax return you can only deduct $17,600 in wages for that individual.  If you are the single owner of an S Corp and in the top tax bracket, that would reduce your effective tax savings by $840 ($2,400 x 35% tax bracket).

The WOTC is taken on Form 3800 of your personal return as a general business tax credit, but it is not refundable.  In other words, if your total tax liability after other credits and deductions comes to zero for the year, you cannot take the WOTC for that year.  You can carry it forward up to twenty years or carry it back to the previous year.