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Act Now - Last Chance to Leverage the Work Opportunity Tax Credit Before It Sunsets in 2025!
The Work Opportunity Tax Credit (WOTC) has long been a valuable tool for employers looking to leverage tax savings while providing employment opportunities to individuals from specified target groups. As the credit stands to sunset after December 31, 2025, without any Congressional action to extend it, this may represent the final opportunity for businesses to capitalize on its benefits. This article delves into the intricacies of the WOTC, including the qualifications, targeted groups, eligible working hours, and the certification process that employers must be aware of to make the most of this potential tax savings.
Understanding the Work Opportunity Tax Credit: The WOTC is a federal tax credit available to employers’ hiring individuals from certain groups who have historically faced significant barriers to employment. The aim is to incentivize employers to select candidates from these groups, thus helping to diversify and strengthen the workforce. Eligible individuals must commence their employment before January 1, 2026, to qualify under the current legislation.
Eligible Target Groups: The WOTC focuses on a variety of target groups, including but not limited to:
Veterans: Particularly those unemployed for at least four weeks or are service-connected disabled veterans.
Long-term Unemployed: Individuals unemployed for 27 consecutive weeks or more.
Ex-Felons: Individuals with difficulty finding employment due to their past convictions.
Supplemental Nutrition Assistance Program (SNAP) Recipients: Individuals who have received food stamps in the past 6 months.
Temporary Assistance for Needy Families (TANF) Recipients: Those who have received assistance within the last 2 years.
Designated Community Residents and Summer Youth Employees: Individuals aged 18 to 39 residing in Empowerment Zones.
Vocational Rehabilitation Referrals: Those with physical or mental disabilities who have been referred through a rehabilitation agency.
The crucial aspect of the WOTC is ensuring that these individuals start their employment before the defined deadline, despite Congressional habits of extending the credit in the past.
Credit Amounts and Limitations: The WOTC allows employers to claim a tax credit for a portion of the wages paid to these eligible employees. The amount varies based on the target group and the number of hours worked:
General Rule: Up to 40% of the first $6,000 paid to or incurred on behalf of an employee, translating to a maximum credit of $2,400 per employee.
Veterans: For disabled veterans, the credit can reach up to $9,600 if certain conditions are met.
Long-term Unemployed: The credits for this group can be substantial, with provisions allowing for credits up to $5,000.
To qualify, an employee must work at least 120 hours. If the employee works at least 400 hours, employers can claim the full 40% of the first-year wages. If between 120 and 399 hours, the credit rate is reduced to 25%.
Certification Process: Securing WOTC requires navigating the certification process with the State Workforce Agency (SWA). Employers need to submit IRS Form 8850, the Pre-Screening Notice and Certification Request for the Work Opportunity Credit, along with the Department of Labor’s Employment and Training Administration’s (ETA) Form 9061 or 9062 within 28 days of the eligible employee’s start date.
Fast-tracked Certification for Veterans: Veterans generally face a more streamlined certification process. Given the emphasis on supporting veterans, there are expedited procedures that ensure a quicker determination of eligibility, allowing employers to swiftly access the benefits tied to hiring veterans.
When the Credit is Not Available: Certain restrictions apply to the availability of the WOTC:
Relatives and Dependents: An employer cannot claim the credit for hiring their spouse, children, or any other dependents.
Majority Owners: In cases where the employer is the majority owner of the business, hiring themselves or any other major stakeholders does not qualify for the WOTC.
Federal Subsidized Employment Programs: Wages paid under specific federal subsidized employment programs may not be used towards the WOTC.
Implications for Tax-Exempt Employers: While tax-exempt organizations such as 501(c) entities can benefit from the WOTC, the credit mechanics differ. These organizations can only claim the WOTC for hiring qualified veterans, and the credit can only be applied against the employer Social Security tax.
The Urgency to Act: With the looming sunset on December 31, 2025, businesses need to act swiftly if they have not already capitalized on the WOTC. Unless Congress intervenes—which has been the historical pattern but is not guaranteed—this significant tax credit will no longer be available. Furthermore, despite the past trends of extension, the lack of current Congressional action makes this deadline more pressing than ever before.
Employers looking to reduce their tax liability while making impactful hiring decisions should prioritize understanding and utilizing the WOTC. By doing so, not only do they gain financially, but they also contribute positively to the broader societal goals of employment for those facing systemic barriers. Time is of the essence, and ensuring all certifications and documentation are in order promptly will be critical to reaping the benefits of this important soon-to-expire tax credit.
Contact this office with questions and how this credit might apply to our business.
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