Labor costs are one of the biggest expenses of any small business. The total cost of an employee is every increasing with laws requiring various insurances, benefits and paid leave time. Some businesses may be able to reduce some of their labor costs by taking advantage of a tax credit for hiring employees that are members of targeted groups where workers face significant barriers to employment. The allowable credit amount is based on a portion of wages paid to an eligible worker during the first year of employment or, in some cases or veterans, during the first two years.
The Work Opportunity tax credit (WOTC) is a federal income tax credit which means it is a direct reduction of (credit toward) any income taxes you owe. How much can you save with the WOTC? In most cases, the credit equals 40% of eligible wages paid to an employee during the first year of employment, up to a maximum of $6,000 of wages ($2,400 per employee). The WOTC is increased to $6,000 of first-year wages for several categories of qualified veterans. The credit for a qualified summer youth employee equals 40% of eligible first-year wages, up to a maximum of $3,000 of wages ($1,200 per employee). The employee’s period of service must be between May 1 and September 15.
To qualify, the worker must have a minimum of 120 hours of work. The maximum credit can be taken if the employee works in excess of 400 hours. The credit is available only for new hires and those employees that are unrelated to the business or its owners. Wages paid to an individual who was previously employed by your business and is rehired don’t qualify.
Individuals who are members of a targeted group generally must be certified by a designated local agency by the day the individual begins work. The employer also must submit additional forms to the Department of Labor. Current law provides the following categories of WOTC-eligible workers:
1. Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients,
2. Unemployed veterans, including disabled veterans,
4. Designated community residents living in empowerment zones or rural renewal counties,
5. Vocational rehabilitation referrals,
6. Summer youth employees living in empowerment zones,
7. Supplemental Nutrition Assistance Program (SNAP) recipients,
8. Supplemental Security Income (SSI) recipients,
9. Long-term family assistance recipients, and
10. Qualified long-term unemployment recipients (defined as those who have been unemployed for a period of at least 27 weeks and who received state or federal unemployment benefits during all or part of that time).
Talk to your tax professional if this is something that can benefit your business.