Work Opportunity Tax Credit
This letter is in response to your recent request for information on the Work Opportunity Tax Credit (WOTC) and how you can become eligible to take the credit while you are in the process of seeking and hiring new employees.
Congress has tinkered with the WOTC many times in recent years. The Small Business and Work Opportunity Tax Act of 2007 extended the Work Opportunity Tax Credit through August 31, 2011. The American Recovery and Reinvestment Act of 2009 expanded the WOTC to cover more unemployed veterans and disconnected youth.
Additionally, the WOTC is temporarily combined with the Welfare-to-Work Credit.
Now let’s examine the credit itself. The Internal Revenue Code provides that the WOTC is available on an elective basis for employers who hire individuals from one of specific targeted groups such as qualified SSI and food stamp recipients, qualified ex-felons and others. The credit generally equals 40% of qualified wages (reduced to 25% for employment of 400 hours or less). The term “qualified wages” generally means wages attributable to service rendered by a member of a targeted group during the one-year period beginning with the day the individual began work for the employer.
The maximum credit that you can take per eligible employee is generally $2,400 (40% of the first $6,000 of qualified first-year wages). For qualified summer youth employees, the maximum credit is $1,200 (40% of the first $3,000 of qualified first-year wages). The employer’s regular deduction for wages paid is reduced by the amount of the credit. You should note, however, that the IRS will not permit a credit to be taken for wages paid to an employee who works fewer than 120 hours in the first year of employment.
Once you have found an employee that you believe is eligible for the credit, in order to take the credit you must complete IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity and Welfare-to-Work Credits, and file with the WOTC coordinator for your state no later than the 21st day after the employee begins working for you. In addition, there is a form that you will need to obtain from the Department of Labor with respect to the employee that also must be sent to the WOTC coordinator for your state along with Form 8850.
Please feel free to contact us to assist you in taking advantage of this valuable tax credit. We will be glad to help you with all of the work through all of the legal requirements and paperwork necessary to take advantage of the tax credit.
Arthur Lee Moye III
Certified Public Accountant
MBS Accountancy Corporation