As you may know, the federal Work Opportunity Tax Credit (WOTC) was extended last December by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act of 2015). The WOTC had technically expired as of December 31, 2014, but this recent legislation retroactively extended the WOTC for the period 2015 through 2019.
How the WOTC Works for Your Business
The WOTC is available for businesses across various industries, regardless of the size of the business. With an ever-changing and dynamic work force, many manufacturing and distribution companies may be in a position to take advantage of this tax credit. This is a federal tax credit that can reduce a business’ federal tax liability (subject to certain limitations), and if unused in a year can be carried back or carried forward by the taxpayer. It is also available for pass-through entities (S Corporations and Partnerships/LLC’s) and their owners. Thus, it is important for a business to be aware of the WOTC and how it might qualify to take advantage of this credit.
A business can obtain a WOTC for qualified first and/or second year wages it paid to a “targeted group” of employees during the tax year. A targeted group of employees for WOTC purposes is defined to include the following nine categories:
- Long-term family assistance recipient;
- Qualified recipient of Temporary Assistance for Needy Families (“TANF”);
- Qualified veteran;
- Qualified ex-felon;
- Designated community resident;
- Vocational rehabilitation referral;
- Summer youth employee;
- Recipient of Supplemental Nutrition Assistance Program benefits (“SNAP,” often referred to a “food stamps”);
- And, SSI recipient.
The above nine targeted groups will apply for WOTC purposes during tax years 2015 and before. A new, tenth category of targeted groups was added beginning in 2016 (see discussion below).
Please refer to IRS Form 5884, Work Opportunity Credit, and related instructions for more descriptions and information on these targeted groups of employees for purposes of the WOTC.
Guidelines on Claims
WOTC Certification and Form 8850
One of the unique aspects of claiming the WOTC is that the employer and the employee must request from a designated local agency (DLA), also known as a local or state employment agency, that the employee meets the requirements to be a qualified individual. This step is done at the time the employee is hired; it can not be completed later when the tax return is being prepared. The employer and employee do this by filing IRS Form 8850 with the DLA within 28 days of the employee beginning work with the employer. While this might seem to be an extra step, it is designed to remove the employer from making the final determination as to whether the employee is in one of these targeted groups, and thereby places this responsibility on the DLA.
Limited Transition Relief for 2015 and 2016
Since the WOTC had expired at the end of 2014, it was not available in 2015 and there was no need to file the Form 8850 within the 28 day period. Now, however, that the WOTC has been retroactively extended for all of 2015, the employers and employees will need to go back and gather the necessary information to request that these employees be certified as eligible for the WOTC. [Please note that in addition to the Form 8850, the employer must also submit to the DLA: Department of Labor Employment and Training Administration (ETA) Form 9061 (Individual Characteristics Form) and Form 9062 (Conditional Certification)]. The IRS issued Notice 2016-40 on June 17, 2016 to provide additional relief for taxpayers to claim the WOTC for the 2015 tax year and 2016 tax year.
2015 Tax Year
- For any WOTC eligible individuals hired in 2015, the due date for obtaining the proper documentation (Form 8850) has been extended to September 28, 2016. Once the certification is obtained for the qualified individuals, then the employer company can calculate and claim the WOTC on their 2015 tax returns (or amend the 2015 tax return if the 2015 tax return has already been filed).
2016 Tax Year
- Besides the retroactive extension of the WOTC for all of 2015 and extending this credit through 2019, the PATH Act of 2015 also added a new category of individuals eligible for the WOTC. Beginning for employees hired on or after January 1, 2016, a new category of eligible WOTC employee exists for a “qualified long-term unemployed recipient.” This recipient is defined to include an individual that has been unemployed for at least 27 weeks, and who has received at least some unemployment compensation payments from a federal or state program (the period of unemployment compensation can be for any time period; it need not be 27 weeks or more). IRS Notice 2016-40 mentioned above also provides relief for any employee hired in 2016 from January 1, 2016 through August 31, 2016 that falls under any of the targeted group of employees, including the new qualified long-term unemployed recipient. The due date for gathering these forms (Form 8850) is also extended until September 28, 2016.
- Finally, for any WOTC-eligible employee hired on or after September 1, 2016, there is no relief under IRS Notice 2016-40. For these employees, the employer and employee must complete the paperwork and file the Form 8850 within 28 days after the employee is hired.
Additional WOTC Information
As a reminder with respect to wages paid to qualifying WOTC individuals, employers are eligible for a 40 percent tax credit (a higher percentage is available for some qualified WOTC employees) on the first $6,000 of wages paid to such individual, for a maximum credit of $2,400 per eligible employee.
For you reference, please consult the following items:
Don’t Lose an Opportunity for this Tax Credit
Manufacturers and distribution companies of all shapes and sizes need to review the employees they hired in 2015 and 2016 to see if any of these employees might qualify as WOTC employees, and thus entitle the business to a federal WOTC tax credit. For employees hired in 2015 tax year and in the first part of 2016 that might qualify for the WOTC, the Form 8850 must be filed on or before September 28, 2016. Thus, time is of the essence to secure these tax benefits. Please contact your Sikich tax advisor if you have any questions on the WOTC, or any other tax matter.
By: Jim Brandenburg