While negotiations over potential changes to the tax laws continue in Washington, one thing is certain — an often-overlooked tax break for employers presents greater saving opportunities than ever, especially those ramping up hiring. That’s because the Work Opportunity Tax Credit (WOTC) already has been extended and some of the certification requirements temporarily loosened.

Basics

The WOTC is designed to encourage employers to hire workers from certain targeted groups that historically have found it challenging to land employment. The amount of the credit ranges from $2,400 up to $9,600 per employee, depending on the targeted group and the qualified wages paid to the new employee.

Generally, the credit equals 40% of qualified first-year wages for individuals who work at least 400 hours that first year. No cap applies to the number of new hires who can qualify. The amount of the credit is limited by the amount of business income tax liability or Social Security tax owed. The normal carry-back and carry-forward rules for general business tax credits apply.

To treat a new hire as a member of a targeted group, an employer must either:

• Obtain certification from the state workforce agency that the individual is a member of a targeted group on or before the first day of work, or
• Complete a pre-screening notice (Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Tax Credit”) on or before the day employment is offered and submit the notice to the state workforce agency to request certification within 28 days after the individual starts work.

New hires must work at least 120 hours before you can claim the WOTC. Note that claiming the credit can affect the availability of other tax credits.

Recent Developments

The WOTC is among a group of temporary tax incentives sometimes referred to as “extenders” because Congress typically extends them annually. In 2020, though, the Consolidated Appropriations Act (CAA) extended the credit through 2025.

In addition, the IRS recently announced that it’s extending the deadline for certification requests for members of the designated community resident and qualified summer youth employee target groups. Among other requirements, these individuals must have a principal place of residence within an Empowerment Zone where they continuously reside.

The extension was necessary because, in addition to extending the WOTC, the CAA generally extended the period for which Empowerment Zone designations are in effect through 2025. As a result, employers may need more time to comply with certification requirements.

Employers that hired a designated community resident or qualified summer youth employee who began work in 2021 may not have submitted Form 8850 within the 28-day deadline. Those that didn’t now have until November 8, 2021, to submit the form.

Employers that submitted their Form 8850s but were denied certification due to the expiration of Empowerment Zone designations must re-submit their forms by the same date. Re-submission isn’t necessary for employers that submitted their forms but weren’t issued denial letters.

Don’t Leave Money on the Table

That’s not all of the (potentially) good news for WOTC-eligible employers: Democrats have proposed increasing the amount of the credit to 50% for the first $10,000 in wages through 2023 in the budget reconciliation bill currently percolating in Congress. Stay tuned to see if that or any other WOTC-related changes make the cut in the final bill.

To make the most of the WOTC, employers need to stay on the lookout for those candidates who fall within the targeted groups and promptly take the steps to obtain certification. Doing so can add thousands of dollars to your bottom line. Contact us for more information.