The WOTC Benefits Employers and the Unemployed

The WOTC Benefits Employers and the Unemployed

Photo © 2011 J. Ronald Lee

When traveling from our beautiful campus here in Urbana Illinois to my local abode, I’ve come to notice people camped out along Interstate 74 and Champaign/Urbana overpasses.

Yesterday, I remarked to myself that I should offer to pick these people up and take them over to the employment office at our local Federal Express terminal. They are constantly looking for workers and I felt I could follow Ronald Reagan’s advice that the best social program he ever knew to be created was a job. But being me, not only would I take the homeless persons to the employers, but I would also have stopped in the employment office to educate the company as to why they might consider the benefits of hiring some of these unfortunate souls (at least from my perspective of being a tax person). Please don’t comment on my lack of social understanding; there must be some trauma that has caused a person or family to be forced to ask for help while standing on a highway overpass.

Enter the Work Opportunity Tax Credit (WOTC)

It provides employers with credits to encourage the hiring of targeted potential employee groups. Beyond the personal issues which may have caused the circumstances impacting the people on the overpass, I’ve come to also understand employers can receive the WOTC credit for unemployed persons. That group is intriguing to me and hopefully that phrase has your attention to read on.

First, let me give you the “bones” regarding the WOTC:

1. 1. The Work Opportunity Tax Credit, or WOTC, is a general business credit provided under IRC §51.
   2. It is jointly administered by the IRS and the Department of Labor (DOL).
   3. The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025. (The Consolidated Appropriation Act, 2021 (CAA) (§113 of Division EE P.L. 116-260) authorized the extension of the WOTC until December 31, 2025).
   4. The WOTC may be claimed by any employer that hires and pays or incurs wages to certain individuals who are certified by a designated local agency (think state workforce agency or office of employment security) as being a member of one of 10 targeted groups.
   5. In general, the WOTC is equal to 40% of up to $6,000 of wages paid to, or incurred on behalf of, an individual who:
      • Is in their first year of employment;
      • Is certified as being a member of a targeted group; and
      • Performs at least 400 hours of services for that employer.
   6. The maximum tax credit is generally $2,400. A 25% rate applies to wages for individuals who perform fewer than 400 but at least 120 hours of service for the employer.

• • • (Interesting observation.  400 hours x $15 minimum wage = $6,000)
    • Up to $24,000 in wages may be taken into account in determining the WOTC for certain qualified veterans.

1. 7. An employer cannot claim the WOTC for employees who are rehired.
   8. In general, taxable employers may carry the current year’s unused WOTC back one year and then forward 20 years. Form 3800, General Business Credit, is used to claim the credit. Typically, general business credits are non-refundable, (can’t bring tax to below $0, but any “leftovers” can be carried back or forward as mentioned previously (see IRC §39 for more information)) and reduce income tax but not self-employment tax. You might keep a lookout for these credits to be separately stated on K-1’s from partnerships or subchapter-S corporations. The only type of entity that I believe would see the direct benefit is a regular C-corp. Sole proprietors would see the benefit on Schedule 3 of Form 1040.

Who Qualifies for the WOTC?

Let’s talk for a moment about the unemployed who qualify for the WOTC. This is the targeted group I’m most interested in mentioning given the workforce shortage and the increased need for employees at this time of the year. The IRS describes these persons as “Qualified Long-Term Unemployment Recipients.”

What does it take to be a “Qualified Long-Term Unemployment Recipient?”

1. 1. One who has been unemployed for not less than 27 consecutive weeks at the time of hiring and
   2. Received unemployment compensation during some or all or the unemployment period.

Pretty broad definition, isn’t it?

Hiring from “targeted groups” must be pre-certified

1. 1. An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit.
   2. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work.
   3. Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850.

Can an employer use the WOTC credit as well as other recent credits such as the Employee Retention Credit (ERC)?

The short answer is ‘yes’ but you will notice with most of these credits, the theme is that you can’t use the same wages for the same period for multiple credits at the same time.

Perhaps you can be a hero to your employers who will gain much-needed employees and receive assistance in bringing them on board.

Well, back to the people on the overpass. Alas, in the final analysis, I did nothing, and the same destitute people were on the overpass again this morning. Maybe I should stop talking and put some of my good ideas into action. The best social program might be a job, but it should start with offering a hand up.

By Tom O’Saben, EA