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Hiring from Certain Disadvantaged Groups Can Strengthen Your Workforce and Save Tax

August 26, 2016

In the midst of hiring? You can minimize labor costs by availing yourself of the Work Opportunity Tax Credit, which was recently expanded by the PATH Act.

Finding qualified workers and minimizing labor costs are two related challenges manufacturers face today. KLR’s 2016 Manufacturing Industry Survey report identified a lack of qualified workers as the second most significant barrier to growth in 2015. Moreover, 69% of respondents expect labor costs to increase or significantly increase over the next year.

The Work Opportunity Tax Credit (WOTC) can help lower the after-tax cost of labor — and many workers who would qualify you for the credit, could be a good fit for your factory or warehouse. Here’s a closer look at this recently expanded credit.

Who’s Eligible

The Protecting Americans from Tax Hikes (PATH) Act of 2015 extended the WOTC through 2019. You may be eligible for the credit if you hire from designated “target” groups, such as food stamp recipients, ex-felons, and unemployed or disabled veterans.

Under the PATH Act, effective in 2016, the list of qualifying target groups has been expanded to include the long-term unemployed — generally those who have been unemployed for 27 weeks or more and received unemployment compensation during at least a portion of that time.

Valuable Savings

For hires from most groups, the credit generally is 40% of the first $6,000 of wages paid to the employee, so the maximum possible credit is $2,400. For hiring a disabled veteran, the maximum credit generally is $4,800.

But the maximum credits are even higher for hiring veterans who’ve been unemployed for six months or more in the preceding year: $5,600 for nondisabled veterans and $9,600 for disabled veterans.

There’s no statutory limit on how many new hires you can claim the credit for. So, if, for example, you hire 10 disabled veterans, your credit could be $96,000.

Certification Needed
To be eligible to claim the credit, you must obtain certification from a “designated local agency” (DLA) that the worker you hired is a member of a qualifying target group.

You can either:

  1. Obtain certification from the DLA that the employee is a member by the time the employee starts work, or
  2. Complete IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” by the time you make the job offer and submit it to the DLA no later than the 28th day after the employee begins work and receive the DLA certification before actually claiming the credit.

Controlling Labor Costs While Expanding
The Work Opportunity credit can provide valuable tax savings and help you control the cost of expanding your workforce. But the rules are complex.

Please contact KLR’s tax specialists to learn more about qualifying for the credit and other tax-smart ways to manage labor costs.

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