Seasonal Summer Employees and the Work Opportunity Tax Credit
- What is the Work Opportunity Tax Credit?
- Learn about the maximum credit amount.
- Find out who can claim the credit.
- Find out which employees qualify for the credit.
- Learn about pre-screening and certification.
- Find information about tax-exempt employers.
Summer is here, and the need for seasonal employees to fill in for workers who are on vacation during the busy months and even for some gearing up for the upcoming hectic holiday season. However, given the current labor shortage, many businesses are facing a tight jobs market. So, it may be time to become creative.
One solution might be hiring family members. From a personal perspective, it makes more sense to keep the family employed rather than hiring strangers, provided, of course, that the family member is suitable for the job.
You might even consider hiring your children to work in your business regularly. Rather than helping to support your children with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and pay commensurate with the hours and the job worked. Also, more likely than not, tax returns will have to be filed for the children and they may owe taxes. Even so, the net result is likely to be less overall tax than would be due to having higher Schedule C income.
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Another solution might be hiring long-term unemployment recipients and other groups of workers facing significant barriers to employment. Doing so may allow you to benefit from the Work Opportunity Tax Credit (WOTC).
The Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit (WOTC) is a general business tax credit that is jointly administered by the Internal Revenue Service (IRS) and the Department of Labor (DOL). The WOTC is available for wages paid to specific individuals who begin work on or before December 31, 2025.
The WOTC may be claimed by any employer that hires and pays or incurs wages to specific individuals who are certified by a designated local agency (sometimes referred to as a state workforce agency) as being a member of one of 10 targeted groups.
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 within their first year of employment with the business;
- Is certified as being a member of a targeted group; and
- Performs at least 400 hours of services for that employer.
However, an employer cannot claim the WOTC for employees who are rehired.
Maximum Credit
Thus, 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 their employer. Up to $24,000 in wages may be considered in determining the WOTC for certain qualified veterans.
Who Can Claim the Credit
Employers of all sizes are eligible to claim the WOTC. This includes both taxable and certain tax-exempt employers located in the United States and certain U.S. territories. Taxable employers claim the WOTC against income taxes, and in general, may carry the current year’s unused WOTC back one year and then forward 20 years. “Carrying back” the credit means that the tax return filed for the prior year will need to be amended to claim the credit on that return. The procedure is different for eligible tax-exempt employers; please contact your Fiducial representative for details.
Qualified Employees – An employer may claim the WOTC for an individual who is certified as a member of any of the following targeted groups:
- Qualified IV-A Recipient (relates to Temporary Assistance for Needy Families (TANF))
- Qualified Veteran
- Qualified Ex-Felon
- Qualified Designated Community Resident (DCR)
- Qualified Vocational Rehabilitation Referral
- Qualified Summer Youth Employee
- Qualified Supplemental Nutrition Assistance Program (SNAP) Recipient
- Qualified Supplemental Security Income (SSI) Recipient
- Qualified Long-Term Family Assistance Recipient
- Qualified Long-Term Unemployment Recipient
Pre-screening and Certification
An employer must obtain certification that the individual is a member of the targeted group before the employer may claim the credit. 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. Employers should contact their state workforce agency with any specific processing questions for Forms 8850. Instructions to Form 8850 provide details about the targeted groups.
Need additional information and assistance to determine if hiring family members or hiring individuals who qualify for the WOTC is appropriate for your business? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
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