-By Mark Battersby-
Uncle Sam, the IRS and the Department of Labor, all want to help rural building businesses cut their labor costs. The Workforce and Innovation and Opportunities Act of 2014 was created to help develop skilled workers, while the tax laws contain the often misunderstood and little-used Work Opportunity Tax Credit.
The Work Opportunity Tax Credit or WOTC is a long-standing income tax benefit that encourages employers to hire workers from within designated groups. And, the WOTC isn’t chicken feed. The credit is generally equal to 40 percent of the newly-hired worker’s first year wages of up to $6,000, for a maximum credit of $2,400 per worker. For disabled veterans, the credit may be available for the first $24,000 of wages or up to $9,600 per worker. Best of all, the tax credit, unlike a tax deduction, offsets the employer’s final tax bill.
Although the WOTC is a federal tax credit, it is administered at the state level. The tax credit claimed by employers depends on the target group of the individual hired, the wages paid to that individual in the first year of employment and the number of hours worked by that individual.
Because lawmakers incentivize hiring, employers can claim the tax credit for a qualifying employee in their first year of hire. After all, staying on the job for more than a year is great, but the WOTC was designed to give people a chance at a job.
As mentioned, the tax credit, depending on the category of the person hired, allows a building business to claim between $2,400 and $9,600 per person. Businesses that do a lot of hiring—especially those hiring hourly workers—would benefit by attempting to determine whether job candidates fall within one of the targeted groups.
The groups targeted by Congress include those on government assistance programs, veterans, the disabled, felons and the long-term unemployed. Specifically, the 10 categories are:
- Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
- Unemployed veterans, including disabled veterans
- Designated community residents living in Empowerment Zones or Rural Renewal Counties
- Vocational rehabilitation referrals
- Summer youth employees living in Empowerment Zones
- Food stamp (SNAP) recipients
- Supplemental Security Income (SSI) recipients
- Long-term family assistance recipients, and
- Qualified long-term unemployment recipients
For the TANF target group only, the credit is available to employers who hire members of this group for up to a two-year period. In the first year the building business claims a tax credit equal to 40 percent of the first-year wages, up to the maximum tax credit, if the individual works at least 400 hours. In the second year, an employer may claim a tax credit equal to 50 percent of the second-year wages, up to the maximum, if the individual works at least 400 hours.
For all other targeted groups, the credit is available to employers who hire members of the targeted groups based on the hours worked and the wages earned by the worker in the first year. If, for example, the individual works at least 120 hours, the employer may claim a tax credit equal to 25 percent of those first-year wages up to the maximum tax credit. If the individual works at least 400 hours, a tax credit equal to 40 percent (up to the maximum) may be claimed.
Once an employer finds WOTC-eligible workers, as with all things tax-related, proper forms and timely-filing is critical. The key document is IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to prescreen employees.
The DOL’s Employment and Training Administration or ETA is also involved. The completed and signed IRS and ETA forms are submitted to the proper state workforce agency (not the IRS or a federal agency) within 28 calendar days of the employee’s start date.
Utilizing a Professional Employer Organization, or PEO, might be feasible. A PEO provides a service under which an employer can outsource employee management tasks. Until recently, claiming the WOTC as a client of a PEO remained a complex exercise. Fortunately, this changed thanks to an IRS program that allowed a PEO to become a “Certified” Professional Employer Organization, or CPEO, allowed to offer value-added benefits to their clients while clearing up the question of who owned tax credits.
Several incentives, in addition to the WOTC, exist to ease the financial burden. They include:
- Veteran Hire Incentives: The U.S. Department of Labor’s Special Employer Incentives (SEI) Program connects qualified Veterans with a specific role in a business. Employers are reimbursed for up to half the Veteran’s salary to cover certain supplies and equipment, additional instruction or training expenses and for any loss of production.
- Disabled Access Credit: The Disabled Access Credit provides a non-refundable tax credit for building businesses incurring expenses for providing access to persons—employees or customers—with disabilities. Eligible is any business that earned $1 million or less or had no more than 30 full-time employees in the previous tax year.
- Barrier Removal Tax Deduction: The Architectural Barrier Removal Tax Deduction encourages businesses to remove architectural and transportation barrier to the mobility of person with disabilities and the elderly. Business may claim a tax deduction of up to $15,000 a year for qualified expenses for items that must normally be capitalized.
- Best of all, a business may use the Disabled Tax Credit and the architectural/transportation tax deductions together in the same tax year if the expenses meet the requirements of both provisions. To use both, the deduction is equal to the difference between the total expenditures and the amount of the credit claimed.
And, don’t forget about resources such as:
- Career One-Stop Business Centers: The American Job Centers offer a range of customized training options to meet a building business’s needs and assist in recruiting, hiring, training or up-skilling the workforce. (careeronestop.org).
- Registered Apprenticeship Quick-Start Toolkit: Apprenticeships offer a proven, high caliber training strategy for workers to learn the skills needed by today’s employers and for businesses to grow and thrive in today’s competitive environment. (doleta.gov/oa/employers/apprenticeship_toolkit.pdf)
- Incumbent Worker Training: Business-led state and local workforce boards offer training services to help businesses remain competitive by updating or enhancing the skills of their current workforce. On a limited basis, workforce boards can reimburse employers for the extraordinary costs of training new front-line hires through on-the-job and customized training. Information about this and other hiring incentives can be found on the Website for the Department of Labor (www.dol.gov).
There is no limit on the number of qualified individuals that a building business can hire, making the WOTC a significant option for any business willing to add a screening phase to their hiring process. Still, many businesses balk because of a concern about being accused of discrimination, that the administrative burden is too time-consuming or uncertainty about whether the tax credit will be renewed by lawmakers.
Of more immediate downside of the WOTC is that it is only a temporary tax break. The WOTC was extended through 2019, giving employers several more years of tax incentives to hire eligible workers, including veterans. Will your building business join other employers who cut their business expenses and currently claim over $1 billion in tax credits each year under the WOTC program?
Mark Battersby has more than 35 years experience in small business issues, tax and financial matters. Contact him at 610-789-2480 or MCBatt12@Earthlink.net.