With a new year beginning, companies can obtain “hirer” credits to reduce their tax liabilities. One credit that employers should be aware of is the Work Opportunity Tax Credit, which has been extended to December 31, 2019, with the passing of the PATH Act in 2015. This informational bulletin details the amounts of the credit, eligible employees for the credit, and some useful links for employers thinking about the credit.

The Work Opportunity Tax Credit (WOTC), was reinstated with President Obama’s passing of the PATH Act in 2015. WOTC was extended until December 31, 2019, and is a specific credit that is part of the General Business Credits available to employers. WOTC allows companies to receive a nonrefundable credit for wages paid to members of certain “targeted groups.” Generally speaking, companies who hire employees from targeted groups that have a particularly high unemployment rate or other special employment needs can earn a credit up to $2,400 per employee for the first year of their employment, or $9,000 for two years in certain cases.

New employees who are a part of the following “targeted groups” qualify for WOTC as long as the employer has obtained a certification from a designated local agency stating that such an individual belongs, or the employer completes a pre-screening notice with respect to the individual by the date of the employment offer and submits the signed pre-screening notice to the designated local agency no later than 28 days after the individual begins work.

WOTC “targeted groups” include the following individuals:

1. A qualified IV-A recipient (TANF recipient),
2. A qualified veteran,
3. A qualified ex-felon,
4. A designated community resident,
5. A vocational rehabilitation referral,
6. A qualified summer youth employee,
7. A qualified supplemental nutrition assistance program recipient (SNAP),
8.  A qualified supplemental security income recipient (SSI),
9. A long-term family assistance recipient,
10. A qualified long-term unemployment recipient hired after 2015, or
11. An unemployed veteran or disconnected youth hired in 2009 or 2010

When a company has employed a new hire from one of the targeted groups, then a percentage of the employee’s wages can be claimed as a credit on the company’s tax return. The nonrefundable credit is calculated as 40% of the qualified first-year wages paid or incurred for employees who worked at least 400 hours for the taxpayer. If the employee worked more than 120 hours, but less than 400 hours for the employer, then the credit is reduced to 25% of the qualified first-year wages.

Additionally, if a new hire is part of the long-term family assistance recipients targeted group, then 50% of qualified second-year wages can be claimed.

Not only does the targeted group determine the percentage of qualified wages allowed to be claimed, but it also determines the amount of qualified wages subject to that percentage. For members of the summer youth targeted group, $3,000 of qualified wages are allowable for a maximum credit of $1,200 for the first year of employment. For members of the long-term family assistance recipients, $10,000 of qualified wages are allowable for a maximum credit of $4,000 in the first year and $5,000 in the second year. Qualified veterans first-year wage limitations could be $6,000, $12,000, $14,000, or $24,000 depending on applicability of service-connected disability compensation, receiving SNAP, and length of previous unemployment. All other targeted groups are limited to $6,000 of qualified first-year wages for a maximum credit of $2,400.

Since WOTC is part of the General Business Credits and a nonrefundable credit, if companies don’t use it in the current year, it can be carried back for one year and forward for twenty.

Here are some links to state agencies to help employers obtain the required certification of employees in targeted groups mentioned above.

1. Indiana: http://www.in.gov/dwd/wotc.htm
2. Kentucky: http://kcc.ky.gov/employer/Pages/Tax-Credits.aspx
3. Ohio: http://jfs.ohio.gov/wotc/index.stm
4. Texas: http://www.twc.state.tx.us/businesses/work-opportunity-tax-credit

As companies are planning for the new year, and thinking about their staffing, it could be beneficial to keep the Work Opportunity Tax Credit in mind and contact a tax professional at Blue &Co. to help navigate some of the details along the way.