Businesses are having difficulties hiring an adequate number of employees as the economy resets after the COVID-19 lockdowns and their aftermath.  As such, small businesses are having to think outside the box as they work toward locating amenable workers.

CAA 2021 Changes

Within the Consolidated Appropriations Act of 2021 (signed into law on 12/27/20) was the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA 2020).  TCDTRA 2020 extended the WOTC to cover qualified first-year wages paid to eligible new hires who begin work by 12/31/25. This means that the hiring and paying of eligible workers in 2021 can qualify for the WOTC.

The WOTC generally equals 40% of “qualified first-year wages” paid to an “eligible employee”, up to a maximum wage amount of $6,000. In other words, a maximum of $2,400 per eligible employee:

$ 6,000       Qualified first-year wages
x      40%

$ 2,400        WOTC

The credit rate is reduced to 25% of “qualified first-year wages” for an employee who completes at least 120 but less than 400 hours of service. In other words, a maximum credit of $1,500 per eligible employee:

$ 6,000       Qualified first-year wages
x      25%

$ 1,500       WOTC

means qualified wages paid for services rendered during the one-year period beginning with the day the newly hired employee begins work.

Note:Special rules apply to the following groups which is discussed later in this article:

• certain veterans,
• long-term family assistance recipients, and
• summer youth employees.

To be designated as an “eligible employee”, the applicable State Workforce Agency (SWA) must certify the new hire as being a member of a “targeted group”.  To do this, the employer can either:

• obtain the certification by the day the employee begins work, or

• complete a pre-screening notice, using a “Pre-Screening Notice and Certification for the Work Opportunity Credit” (Form 8850), by the day the prospective employee is offered a job.  The employer then submits Form 8850 to the SWA within 28 days of the employee’s start date.

Information on to the name, address, phone/fax numbers, and email address of each SWA’s WOTC coordinator can be found here:

www.dol.gov/agencies/eta/wotc/contact/state-workforce-agencies

Note: Qualified unemployed veterans are afforded a simplified certification process.

As discussed, the WOTC can only be claimed when a member of a “targeted group” is hired and paid.  Targeted groups include the following:

• Qualified recipients of aid to families with dependent children or a successor program.
• Qualified veterans.
• Qualified ex-felons.
• Designated community residents.
• Vocational rehabilitation referrals.
• Qualified summer youth employees.
• Qualified supplemental nutrition assistance benefits recipients.
• Qualified SSI recipients (anyone who is certified by the designated local agency as receiving supplemental security income benefits under title XVI of the Social Security Act for any month ending within the 60-day period ending on the hiring date).
• Long-term family assistance recipients.
• Qualified long-term unemployment recipients.

Note: The instructions to Form 8850 provide more detailed definitions of these targeted groups.

General Rule

As previously stated, the WOTC is generally equal to 40% of qualified first-year wages paid to an eligible employee, with a maximum wage amount of $6,000.  For an employee who completes at least 120 but less than 400 hours of service, the credit rate is reduced to 25% of qualified first-year wages

Favorable Exceptions to the General Rule

Qualified veteran who is entitled to compensation for a service-connected disability and who was discharged or released from the military within the last year

Qualified veteran who was unemployed for >= 6 months

Qualified veteran who has a service-connected disability, and was also unemployed >=6months in the prior year

Long-term family assistance recipient

Qualified summer youth employee (a 16-year-old or 17-year-old who lives in an empowerment zone)

• As with most tax credits, claiming the WOTC reduces the related wages dollar-for-dollar for federal income tax purposes.  In the event deducting 100% of the wages yields a better tax result, the WOTC should be forgone.

• Wages taken into account to claim the COVID-19-related Employee Retention Tax Credit or COVID-19 paid qualified sick or family leave cannot also be used for the WOTC.

• The WOTC cannot be claimed for an employee who is

• Also, not qualifying for the WOTC are:

• • wages paid under a federally funded on-the-job training program, or
  • wages paid to employees in strike replacement positions.
    

• Finally, work supplementation payments under §482(e) of the Social Security Act reduce qualified wages.
  

The WOTC is calculated and claimed on IRS Form 5884 (Work Opportunity Credit). Because the WOTC is one of the credits that comprises the General Business Credit (GBC) and, as such, is therefore subject to the GBC limitation rules, the WOTC amount from Form 5884 is carried to Form 3800 (General Business Credits) to continue the calculation.

Any WOTC amount which cannot be utilized for the year it was calculated can be carried back 1 year, and forward for 20 years.

The WOTC for hiring/paying eligible employees can run the gamut from useful to very lucrative. That said, it’s worth a look in the event you are hiring eligible employees.  To facilitate the eligibility determination process, businesses should ask potential new hires the questions necessary to determine if they are a member of a targeted group. If so, that’s a meaningful factor in their favor.

(This is Blog Post #1110)