Work Opportunity Tax Credit Is Set to Expire: What Employers Need to Know

In today's labor market, your business may need to think outside the box to find employees to fill open positions. The good news: You may be able to offset compensation costs with the lucrative Work Opportunity Tax Credit (WOTC) for hiring members of certain "targeted" groups. Be aware that the WOTC is currently set to expire on December 31, 2025, unless Congress extends it. Here are some answers to questions that employers may have about this credit.

Who's in the Targeted Groups?

You can claim the WOTC only for hiring and paying a member of one of the following targeted groups:

1. Qualified recipients of Temporary Assistance for Needy Families (TANF)/IV-A,
2. Qualified veterans,
3. Qualified ex-felons,
4. Designated community residents who are age 18 to 39 and live in certain areas,
5. Vocational rehabilitation referrals,
6. Qualified summer youth employees,
7. Qualified supplemental nutrition assistance benefits (food stamp) recipients,
8. Qualified Supplemental Security Income (SSI) recipients, which includes anyone who's certified by the designated local agency as receiving SSI benefits for any month within the 60-day period ending on the hiring date,
9. Long-term family assistance recipients, and
10. Qualified long-term unemployment recipients.

Before you can claim the WOTC, eligible workers must be certified as members of one of these groups.

How Does an Employer Certify Eligible Employees?

To be an eligible employee for purposes of the WOTC, a new hire must be certified as a member of a targeted group by the applicable state workforce agency (SWA). As the employer, you can either:

• Obtain the certification by the day the employee begins work, or
• Complete a pre-screening notice, using IRS Form 8850, "Pre-Screening Notice and Certification Request for the Work Opportunity Credit," by the day the job is offered to a prospective employee. You must also complete U.S. Department of Labor Employment and Training Administration Form 9061 (or 9062). Then, submit the forms to the SWA (not the IRS) within 28 days after the employee begins work.

You should generally keep copies of all forms, SWA transmittal letters and certification letters for at least three years after the return claiming the credit is due or is filed, whichever is later.

How Do Employers Figure the Credit?

The WOTC generally equals 40% of qualified first-year wages paid to an eligible employee, up to a maximum wage amount of $6,000. That translates into a maximum credit of $2,400 per eligible employee (40% times $6,000).

The credit rate is reduced to 25% of qualified first-year wages for an employee who completes at least 120 but fewer than 400 hours of service. That translates into a maximum credit of $1,500 per eligible employee (25% times $6,000).

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

Are There Any Favorable Exceptions to the General Rules?

Special rules apply to certain veterans, summer youth employees and long-term family assistance recipients. Specifically, these increased first-year wage limits apply to the following workers:

In addition, for a long-term family assistance recipient, the WOTC can be claimed for 50% of qualified second-year wages up to a maximum wage amount of $10,000. That translates into a maximum second-year credit of $5,000 per eligible employee (50% times $10,000) — and a maximum combined credit for the two years of $9,000 ($4,000 plus $5,000).

Are There Any Side Effects to Claiming the Credit?

Employers that claim the WOTC must reduce their federal income tax deduction for the related wages dollar for dollar. But that outcome can be avoided by not claiming the WOTC if deducting the wages gives a better tax result.

Keep in mind that the WOTC can't be claimed for amounts paid under a federally funded on-the-job training program. Work supplementation payments under Section 482(e) of the Social Security Act reduce qualified wages. Wages paid to employees in strike replacement positions also don't qualify for the WOTC.

How Do Employers Claim the Credit?

Your tax advisor can help you calculate and claim the WOTC. This is one of the credits that comprises the General Business Credit and is, therefore, subject to the limitation rules for that credit.

Any unused WOTC amount for the year can be carried back one year. Any still-unused amount for the year can be carried forward for 20 years. If there's still an unused credit amount after the 20-year window closes, you can usually deduct it in the 21st year.

How Should Employers Proceed in Light of the Credit Expiring?

As of now, the WOTC remains in effect only through December 31, 2025. Over more than 25 years, Congress has extended the tax credit many times when it was scheduled to expire. However, unless Congress acts again, the WOTC will expire at year end. There have been legislative efforts in Washington to extend, expand or even make it permanent — but nothing has been enacted yet.

If the WOTC is part of your hiring plans, prioritize screening eligible candidates and submitting needed paperwork. Currently, employers can claim the credit only for individuals who begin work on or before December 31, 2025.

Act Now to Benefit

It's easy for busy small business owners to overlook the WOTC, but this can be a costly mistake — especially this year with the credit being scheduled to expire. It pays to ask potential new hires the questions necessary to determine if they're members of targeted groups. If you hire someone who qualifies for the credit, your tax professional can do the paperwork necessary to claim the WOTC.