Worth a Look: The Work Opportunity Tax Credit

Construction companies continue to look far and wide for laborers. If you’re willing to expand your hiring pool and do some additional tax documentation, the Work Opportunity Tax Credit (WOTC) is worth a look.

The purpose

The WOTC is designed to incentivize employers to hire employees from “targeted” groups made up of typically disadvantaged individuals. The tax break can be worth as much as $2,400 for each eligible employee hired and even more in other cases. For example, the WOTC can be worth $4,800, $5,600 or $9,600 for certain veterans, and $9,000 for long-term family assistance recipients.

The credit is generally limited to eligible employees who begin work for the employer before January 1, 2026. An employer is typically eligible for the credit only for qualified wages paid to members of one or more of 10 targeted groups: 1) qualified members of families receiving assistance under the Temporary Assistance for Needy Families program, 2) qualified veterans, 3) qualified ex-felons, 4) designated community residents, 5) vocational rehabilitation referrals, 6) qualified summer youth employees, 7) qualified members of families in the Supplemental Nutrition Assistance Program, 8) qualified Supplemental Security Income recipients, 9) long-term family assistance recipients, and 10) qualified long-term unemployed individuals.

There’s also a minimum requirement that each employee must have completed at least 120 hours of service for the employer. The credit is unavailable for certain employees who are related to the employer or work more than 50% of the time outside of the employer’s trade or business. Additionally, the credit is generally unavailable for employees who’ve previously worked for the employer.

The calculations

For employees other than summer youth workers, the credit amount is calculated under a basic set of rules. The employer can account for up to $6,000 of first-year wages per employee ($10,000 for “long-term family assistance recipients”; $12,000, $14,000 or $24,000 for certain veterans). “First year” refers to the year-long period beginning with the employee’s first day of work; “second year” is the year that immediately follows.

If the employee completed at least 120 hours but less than 400 hours of service for the employer, the wages accounted for are multiplied by 25%. If the employee completed 400 or more hours, all accounted-for wages are multiplied by 40%.

Thus, the maximum credit available for first-year wages is, as previously noted, $2,400 ($6,000 × 40%) for most employees. However, a $4,000 credit ($10,000 × 40%) can be calculated for some long-term family assistance recipients. And an employer may be able to calculate credit amounts of $4,800, $5,600 or $9,600 ($12,000, $14,000 or $24,000 × 40%) for certain veterans.

In addition, for long-term family assistance recipients, a 50% credit may be available for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000 ($10,000 × 40% plus $10,000 × 50%).

For summer youth employees, the rules in the preceding paragraph apply, except that the employer can account for only up to $3,000 of wages. These wages must be paid for services performed during any 90-day period between May 1 and September 15. So, for summer youth workers, the maximum credit available is $1,200 ($3,000 × 40%) per employee.

The limits

Certain limits apply to the WOTC. First, no deduction is allowed for the portion of wages equal to the amount of the credit determined for the tax year. Second, other employment-related credits are generally reduced with respect to an employee for whom a WOTC credit is allowed.

And third, the credit is subject to the overall limitations on the amount of business credits that can be taken in any tax year. However, a one-year carryback and 20-year carryforward of unused business credits is allowed.

Because of these limits, there may be circumstances under which an employer might elect not to have the WOTC apply. Also, there are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of the credit.

Two for one

Hiring from targeted groups can fill up your workforce while potentially saving you tax dollars. Contact your CPA for more information about the WOTC.

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