If you’re planning to add employees to your payroll this year, don’t forget about the Work Opportunity Tax Credit (WOTC), which could save you money on your income taxes. The credit is available to employers who hire from target groups that experience barriers to employment, including qualified veterans or ex-felons.The WOTC was due to expire, but it’s been extended through December 31, 2011, as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 signed into law in December.
Designed to encourage employers to add hard-to-employ individuals to their payroll, the credit is generally equal to 40% (only 25% if the employee doesn’t reach a minimum employment level) of the first $6,000 of wages paid to each qualified employee on your payroll. Employers can take the credit on their federal income tax return using IRS Form 5884. Note: You must reduce any wages deducted as a business deduction by the amount of credit you were allowed.
The WOTC only applies to qualified employees working a minimum of 120 hours. The 40% credit applies to qualified employees on your payroll program working 400 or more hours, while the 25% credit applies to employees working less than 400 hours.
Internal Revenue Code Section 51 identifies targeted groups who qualify under the WOTC:
- Qualified IV-A recipients;
- Qualified veterans (credit applies to the first $12,000 of wages for these employees);
- Qualified ex-felons;
- Designated community residents;
- Vocational rehabilitation referrals;
- Qualified summer youth (credit only applies to the first $3,000 of wages for these employees)
- Qualified food stamp recipients;
- Qualified SSI recipients; or
- Long-term family assistance recipients (formerly welfare-to-work individuals; the credit is computed very differently for this group).
(Note: The 2010 Act did not extend the WOTC for two groups: unemployed veterans and disconnected youth.)
To apply for this credit, fill out two forms: the IRS Form 8850 (opens up your request for a tax credit), and the U.S. Department of Labor’s ETA Form 9061 (identifies the individual’s target group for certification). Then, send these forms to your local Agency WOTC Coordinator within 28 days of the new employee’s first day of work.To learn more about this tax credit opportunity, visit the U.S. Dept. of Labor website.