Last chance to take tax credit

The deadline of April 30 is fast approaching for employers to take advantage of the Work Opportunity Tax Credit (WOTC) for 2014. This credit is available to employers that hire individuals who are members of certain designated target groups, generally economically or physically disadvantaged persons and qualified veterans. Although the WOTC expired at the end of 2013, last year’s tax extenders legislation retroactively provided the credit for employees who began work before Jan. 1, 2015.

Complex categories

There are many different categories of eligible employees, with some categories providing a larger credit than others. This can make determining whether an employee qualifies somewhat complicated. In general, employers hiring persons from a number of groups including qualified veterans and food stamp recipients will be eligible for the credit.

The WOTC is based on a percentage (25 percent for employees who worked more than 120 hours but less than 400 hours, and 40 percent for employees who worked 400 or more hours) of qualified first-year wages, which are limited depending on the category of employee. No credit is allowed for employees who work less than 120 hours. Employees who qualify as “long-term family assistance recipients” can generate a credit for the employer equal to 50 percent of the employee’s qualified second-year wages.

The maximum eligible credits for the various types of employees is limited by the amount of qualified first-year wages. For instance, a veteran who has been unemployed for at least four weeks but less than six months can generate a $2,400 credit, based on 40 percent of $6,000 in qualifying wages, whereas a veteran who has been unemployed more than six months and has a service-related disability can generate a $9,600 credit based on 40 percent of $24,000 of qualified first-year wages. For most groups, the WOTC equals 40 percent of eligible wages, up to $6,000 per employee during the first year of employment, for a maximum credit of $2,400 per employee.

Certification deadline extended

Before an employer can claim the WOTC, the employer must obtain certification that the hired individual is a targeted group member. Certification of an individual’s targeted group status is obtained from a Designated Local Agency by submitting a prescreening notice signed by the employee no later than the 28th day after the individual begins work. Form 8850 is used for purposes of obtaining the certification. The IRS has provided transitional relief and extended the deadline to submit Form 8850 to April 30, 2015 for employees hired between Jan. 1, 2014 and Jan. 1, 2015 and who otherwise satisfy the WOTC requirements.

While the WOTC has once again expired as of Jan. 1, 2015, it is a perennial item reinstated with extender legislation. Therefore, employers may consider asking newly hired employees to complete and sign Form 8850 in the event the WOTC is extended through 2015.