Certain Americans, such as veterans, food stamp recipients and teenagers on summer break from school, face steep odds in obtaining employment. But with the extension of the Work Opportunity Tax Credit (WOTC) through Dec. 31, 2019, businesses will receive an ongoing tax incentive to hire them.
The U.S Department of Labor (DOL) notes that the WOTC income tax credit for employers benefits all who participate and helps boost the nation's economic growth and productivity. The WOTC:
- Reduces an employer's cost of doing business
- Requires little paperwork
- Can reduce an employer's federal income tax liability by as much as $9,600 per employee hired
- Does not limit the number of individuals a business can hire to qualify for the tax credit
- Allows certain tax-exempt organizations to hire eligible veterans and receive a credit against the employer's share of Social Security taxes
The extension to the WOTC was tucked into the Protecting Americans from Tax Hikes (PATH) Act, which President Obama signed into law on Dec. 18, 2015. Previous administrations have added extensions to the WOTC since its inception in 1996, but this five-year duration is unprecedented.
WOTC eligibility now includes long-term unemployed
Target groups eligible for hiring under the WOTC are:
- Unemployed veterans, including disabled veterans
- Recipients of Temporary Assistance for Needy Families (TANF)
- Food stamp (SNAP) recipients
- Designated community residents living in Empowerment Zones or Rural Renewal Counties
- Vocational rehabilitation-referred individuals
- Recipients of Supplemental Social Security Income
- Summer youth employees living in Empowerment Zones
In addition to the WOTC extension, the PATH Act added a new category of eligibility for the WOTC: the long-term unemployed. It comprises people certified by a designated local agency as enduring a period of unemployment of at least 27 consecutive weeks in which they received state or federal unemployment wages.
The DOL provides a useful chart detailing certification criteria for the WOTC.
Tax credit calculation
Employers that hire WOTC-eligible individuals generally receive a tax credit equal to 25 percent or 40 percent of a new worker's first-year wages, up to the maximum for the group to which he or she belongs. Your business earns 25 percent for hires who work at least 120 hours during the first year of employment and 40 percent if they work at least 400 hours in that first year. The amount also depends on a new employee's target group. In terms of maximum available credit, this translates to:
- $9,000 for each long-term TANF recipient hired over a two-year period
- $4,800 for each disabled veteran hired one year from leaving the service
- $2,400 for each SNAP (food stamp) recipient hired
- $1,200 for each summer youth* hired
The DOL's WOTC calculator shows how much your business can earn in tax credits. Visit the DOL for detailed information on all aspects of the WOTC, including guidance, resources, contacts and application forms.
The WOTC provides a win-win opportunity for both employers and job-seekers. It gives hard-to-hire individuals who want to work the chance for employment and rewards employers who hire them.
Note: Your company may be able to claim other tax credits, as well as the WOTC. Paychex tax credit services help you identify and collect funds for which your business qualifies, creating a documented, legally compliant audit trail.
* Summer youth qualify for up to 40 percent of the first $3,000 in wages during the required employment period of May 1-Sept. 15.