American Taxpayer Relief Act encourages hiring
The new act extends and expands the work opportunity tax credits.
January 31, 2013
With unemployment still at relatively high levels and business owners continuing to be hesitant to increase payroll costs, Congress intelligently chose to retroactively extend the work opportunity tax credit (WOTC). C corporation taxpayers, equity owners, and even not-for-profit entities can take advantage of these valuable tax incentives that can generate from $1,200 to $9,600 annually in tax credits for each qualified employee. These credits may give employers the necessary incentive to hire more employees domestically.
Before the recent enactment of the American Taxpayer Relief Act of 2012 (ATRA), P.L. 112-240, the WOTC credit had been mothballed for all but certain qualifying veterans since Dec. 31, 2011. Part of ATRA retroactively extends the WOTC for qualified employees who begin work for an employer through Dec. 31, 2013.
Employers who had participated in the WOTC program before 2012 were accustomed to living with the program’s periodic termination and reinstatement, and, as a result, many continued to submit 2012 WOTC applications for their employees hoping that Congress would extend the program. Because the WOTC rules require employers to submit Form 8850, Pre-Screening Notice and Certification for the Work Opportunity Tax Credit, and Form ETA 9061, Individual Characteristics Form, or Form ETA 9062, Conditional Certification, to the appropriate state workforce agency no later than 28 days after the date the qualified employee begins employment, employers who continued to file these forms through 2012 should be able to take advantage of the retroactive reinstatement of the credit for the expanded target groups discussed below.
As of this writing, only those employers that continued to submit their employee WOTC certifications within the 28-day deadline can claim retroactive credits for calendar year 2012. The federal and state workforce agencies have yet to release further guidance on whether they will allow other taxpayers to file 2012 WOTC applications beyond the 28-day deadline.
Another hiring incentive program, the VOW to Hire Heroes Act of 2011 (VOW Act), P.L 112-56, makes the WOTC credit available as a credit against the employer’s Social Security tax for tax-exempt organizations that hire qualified veterans (see below). However, the percentages used to calculate the credit are lower for tax-exempt organizations. The WOTC for veterans hired by a tax-exempt organization under the VOW Act was originally set to expire Dec. 31, 2012, but ATRA extended it through 2013.
The legislative intent behind the WOTC program (Sec. 51) is to spur domestic employment by providing a nonrefundable tax credit to employers that hired and retained a blue-collar workforce and to stimulate economic growth in certain federally designated economically challenged areas.
An employer is eligible for a federal tax credit for hiring individuals that qualify under statutorily defined WOTC target groups. Under Sec. 51(d), these target groups have generally included:
* Note that some WOTC summer youth programs have been discontinued by state workforce agencies due to budget cuts and low program funding.
The WOTC credit is based on a percentage (25% for employees who worked more than 120 hours but less than 400 hours, 40% for employees who worked 400 or more hours) of qualified first-year wages. A credit is not allowed for employees who work less than 120 hours for the employer. For employers that hire individuals who qualify as “long-term family assistance recipients,” a credit is also allowed for 50% of the employee’s qualified second-year wages.
Under Sec. 51(d)(10), a “long-term family assistance recipient” is defined as any individual who is certified by the designated local agency as:
The maximum eligible credits for various employees are as follows:
Not-for-profit entities can also claim WOTC credits
Under Secs. 52(c) and 3111(e), tax-exempt employers can use WOTC credits to offset payroll taxes. The credit is allowed against the employer’s old age, survivor, and disability insurance (OASDI or Social Security—generally 6.2%) tax that the exempt employer would be required to pay for the tax year, but it cannot exceed the OASDI tax payable on all the tax-exempt employees during the applicable employment year. In addition, the credit is modified as follows for tax-exempt employers:
VOW Act program FAQs are available on the IRS website.
WOTC documentation process
As discussed above, an employer must complete and file Form 8850 and Form ETA 9061 or 9062 no later than 28 days after the date the qualified employee begins employment. These forms are available at the U.S. Department of Labor’s website.
Once documented, the employer claims the WOTC credit on Form 5884, Work Opportunity Credit.
Empowerment zone credits
ATRA also extended the designation period under Sec. 1391 for Round I empowerment zones through Dec. 31, 2013. This means that eligible employers will continue to be able to claim an empowerment zone employment credit of up to $3,000 per employee for hiring and retaining employees living and working in an eligible empowerment zone (Sec. 1396) through 2013. Note that employers cannot claim an empowerment zone employment credit and a work opportunity credit for the same wages.
The WOTC is a general business credit. Generally, a taxpayer combines these credits with other general business credits on Form 3800, General Business Credit, and the total credits cannot exceed the excess of a taxpayer’s net income tax over the greater of (1) the taxpayer’s tentative minimum tax for the tax year or (2) 25% of so much of the taxpayer’s net regular tax liability that exceeds $25,000. However, the WOTC is a “specified credit” under Sec. 38(c)(4) and can be used to offset 100% of the AMT.
The extension of these programs should encourage businesses of all sizes, and in virtually any industry, to begin claiming these valuable credits. A large number of businesses and business owners will find that they are eligible for the credits and that they are relatively easy to claim. Therefore, employers desiring to hire new employees and who wish to take advantage of the valuable WOTC benefits can use this article and the links below to become more familiar with the rules.
Following are a few websites and articles that focus on the WOTC and also provide some numeric examples:
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