December 16, 2020

Time Is Running Out to Claim the Work Opportunity Tax Credit

Cash-strapped businesses looking at different options to stretch every dollar may be overlooking a valuable tax benefit: the Work Opportunity Tax Credit (WOTC). Atlanta businesses that hired eligible workers in 2020 might be able to claim between $1,200 and $9,600 for each new hire – if certain conditions are met. Timeliness is a major factor in claiming funds through the WOTC and the credit is only authorized through December 31, 2020, so employers are running out of time to take advantage of this benefit. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

What is the Work Opportunity Tax Credit?

The WOTC was first introduced in 1996 and has been reauthorized several times since. The most recent proposal in the now-stalled HEALS Act called for expanding the WOTC and making the credit permanent. It is possible the tax credit could be retroactively extended in 2021, but nothing is certain.

In FY 2019, nearly 2.1 million U.S. workers were certified as belonging to one of the targeted groups, according to the Department of Labor – but those numbers likely understate the total amount of WOTC-eligible workers, had employers followed through with authorization.  

Targeted groups eligible for WOTC include:

• Qualified IV-A Recipient
• Qualified Veteran
  • Maximum qualified wages per employee: $6,000 – $24,000
• Ex-Felon
• Empowerment Zone Resident*
• Certain Disabled Individuals
• Summer Youth Employee**
  • Maximum qualified wages per employee: $3,000
• SNAP Recipient
• Supplemental Security Income Recipient
• Long-Term Family Assistance Recipient
  • Maximum qualified wages per employee: $10,000/year for up to two years
• Qualified Long-Term Unemployment Recipient***

Unless otherwise noted, employers may claim WOTC against a maximum of $6,000 in first-year wages.

*Individuals must reside in an empowerment zone, enterprise community, or renewal community and be between 18 and 40 years old. The employee must maintain residence in that community after they’re hired.

** Individuals must be between 16 and 18 years old, only employed between May 1 and September 15, and must reside in an empowerment zone, enterprise community, or renewal community.

*** New in 2020, the individual must have been unemployed for at least 27 consecutive weeks at the time of hiring and received unemployment compensation at least some of that time. 

WOTC was designed to incentivize employers to hire those that traditionally faced a harder time obtaining employment. With the addition of the long-term unemployed as one of the targeted groups, many more employers may be able to take advantage of the credit and help put people back to work at the same time.

Some employees are ineligible for the WOTC, such as relatives, dependents, or majority owners of the business.

How to Claim the Work Opportunity Tax Credit

Employers wishing to claim WOTC must start the process before the employee is hired. Though authorization for WOTC ends on December 31, 2020, filing for the credit is a multi-step process that begins with a pre-screening form during the interview and job offer phases.

1. Before the applicant is offered the job, complete a pre-screening authorization form (IRS Form 8850) with the candidate.
2. Within 28 days after the date of hire, submit the completed Form 8850 to the state workforce agency.
   • Alternatively, you may also receive the certification before the employee begins work.
3. Once authorized, the employer must keep track of certain data, including but not limited to the employee’s residence (if certification is based upon it) and wages.
4. To qualify for the WOTC, the eligible employee must work at least 120 hours during the year.
5. Use IRS Form 5884 or Form 3800 to claim the credit for first- and/or second-year wages.

Employers can claim or elect not to claim WOTC at any point within three years of the annual return due date, either on the original or amended return. That means that employers can retroactively claim WOTC for tax years 2018, 2019, or 2020 OR carry the credit forward for three years.

Work Opportunity Tax Credit and the CARES Act

It is possible to claim WOTC and the CARES Act’s Employee Retention Tax Credit on the same employee – just not at the same time. For example, an employer claimed WOTC on an eligible employee in February 2020 and used wages from February, March, April, and May to calculate the full value of the credit. Those pay periods effectively cover the first and second quarters of 2020.

Recall from earlier guidance that the Employee Retention Credit is claimed on a quarterly basis. If an employer claims the WOTC credit on an eligible employee in the first and second quarters of 2020, then that same employer could also claim the Employee Retention Credit for pay periods in the third or fourth quarters – but not for pay periods in April or May, when WOTC was still applied on the employee’s wages.

Just because the WOTC is set to expire on December 31, 2020, employers still want to look at hiring from these targeted groups. Not only does this help to close the skills gap and put disadvantaged people back to work, but if the WOTC is extended in 2021, employers will have the entire year to apply qualified wages and receive the maximum credit. For eligible employees that are already authorized, this may be an excellent year to claim back-dated tax credits and get more money back in the annual tax return.

Contact Us

Timing is important, and the initial steps to claim the WOTC must be taken before the employee is even hired. For this reason, it is important to consult with a qualified tax advisor who can guide you through the process. If you have questions about the WOTC or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.