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Matt Black, Tax Director
The McClatchy Company

Work Opportunity Tax Credit (WOTC)

Overview

In 2009, Congress significantly increased the eligibility criteria for WOTC as part of The American Recovery and Reinvestment Act of 2009 (the “Stimulus Package”). Prior to this, WOTC has been a little used federal tax credit and not many companies took advantage of it because it was very hard for them to qualify their employees. However, with this recent change, we have seen our clients benefit greatly from this new legislation by increasing the number of employees who qualify for WOTC. The result has been a reduction in their federal income tax liability.

Use of the WOTC has substantially increased in recent years as Congress has introduced new target groups, expanded several target groups’ requirements, increased the tax credit for certain groups and introduced new flexible filing provisions. For example, during Fiscal Year 2008, over 691,421 certifications were issued by the state workforce agencies, and this figure is growing every year. On February 17, 2009, the President signed into law the American Recovery and Reinvestment Act of 2009 (Recovery Act). The Recovery Act introduced two new target groups: 1) Unemployed Veterans, and 2) Disconnected Youth. Individuals in these two new target groups must begin work for an employer during 2009 or 2010. The Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28) extended the WOTC Program through August 31, 2011. This Act and the Tax Relief and Health Care Act of 2006 (P.L. 109-432), amended certain target group definitions and introduced new provisions that streamline the WOTC program and make it easier for the business sector to participate.

Tax Credit Value

Each qualified employee can generate up to $2,400, $4,800, and $9,000 (depending upon qualification) in federal tax credits over a 1 to 2 year period. Seasonal and part-time employees can also qualify for the program.

 

Employee Qualificaitons

The Work Opportunity Tax Credit (WOTC) program is a federal tax incentive program that was established with two purposes in mind:  To promote the hiring of individuals who qualify as a member of a targeted demographic group, and to provide a federal tax credit to employers who hire these individuals.  There are multiple criteria by which an employee can qualify a company for federal income tax credits.  Employees who meet any of the following eligibility criteria qualify for the WOTC program:

1. Long-term TANF recipient
2. Other TANF recipient
3. Veteran
4. 18-39 year-old SNAP (food stamps) benefits’ recipient
5. 18-39 year-old designated community resident
6. 16-17 year-old summer youth
7. Vocational rehabilitation referral
8. Ex-felon
9. SSI recipient
10. Hurricane Katrina employee
11. Unemployed veteran
12. Disconnected youth

  • TANF, SNAP (food stamps), or long-term family assistance (LFTA) recipient
  • Qualified or unemployed veteran
  • Qualified ex-felon
  • Designated community resident
  • Vocational rehabilitation referral
  • Summer youth employee
  • SSI recipient
  • Disconnected Youth

Furthermore, with the passage earlier this year of The American Recovery and Reinvestment Act of 2009, there have been some additions to the criteria for the WOTC program, such as the recently added Disconnected Youth category.  We believe that this expansion will likely significantly increase the number of employees qualifying specific companies for federal income tax credits.  To qualify as a Disconnected Youth, an individual must:

  • be at least 16 years of age but under 25
  • have not regularly attended any secondary, technical, or post-technical school during the 6-month period prior to their hire date
  • have not been regularly employed during the 6-month period ending on their hiring date, and
  • not be regularly employable due to lack of basic skills

With regard to this last bullet point, what this really means is that either an employee does not have a high school diploma or GED or that the employee has a high school diploma or GED that was awarded at least 6 months before their hire date, and that they have not held a job (other than occasionally) nor been admitted to a technical school since receiving their diploma or GED certificate.

Benefit
$2,400 generally for each new adult hire
$1,200 for each summer youth hire
$4,800 for each new disabled veteran hire
$9,000 for each new long-term TANF recipient hired over a two year period

For most target groups, the WOTC is based on qualified wages paid to the employee for the first year of employment. Generally, qualified wages are capped at $6,000. The credit is 25% of qualified first-year wages for those employed at least 120 hours but fewer than 400 hours and 40% for those employed 400 hours or more.
Summer youth employees. Wages are capped at $3,000 for 16- and 17-year-olds working for a 90-day period between May 1 and September 15.
Disabled veterans. Wages are capped at $12,000.
Long-term TANF recipients. Wages are capped at $10,000. The WOTC is also available for the employee’s qualified second-year wages, also capped at $10,000. The credit is 40% for the first year and 50% of qualified wages for the second year of employment.

Process

The process to obtain WOTC is very time sensitive but simple. Specifically, 3 forms and a pre-addressed envelope are included in each employee’s new hire packet. The forms consist of simple questionnaires where the employee checks off some boxes “yes” or “no” to see if they qualify. Then they sign the bottom of the forms and mail the forms in the pre-addressed envelope to our processing center at Romo Incentives Group. Once we receive it, if the employee qualifies, we then provide additional paperwork and documentation and then priority mail it to the vouchering officials who must receive the paperwork within 28 days of the employee’s hire date. The timing of the paperwork is very important.  If the vouchering official does not receive the paperwork within 28 days, then the tax credit for that employee will be lost forever.  There is no retro work for WOTC.  This credit is only good on a “go forward” basis and will be for your 2010 and succeeding tax years.

An employer must request and receive certification from its state workforce agency (SWA) that the new hire is a member of one of the nine WOTC target groups before the employer can claim the WOTC on its federal income tax return. To request certification, the employer must:

1.Complete page 1 of IRS Form 8850, Pre-Screening Notice and Certification
Request for the Work Opportunity Credit, by the date of the job offer and page 2 of
IRS Form 8850 after the individual is hired; and

2.Complete one of the following one-page U.S. Department of Labor forms,
as appropriate:

ETA Form 9061, Individual Characteristics Form, if the new hire
has not been given a conditional certification, ETA Form 9062, or

ETA Form 9062, Conditional Certification Form, if provided to
the job seeker by a participating agency, such as a vocational
rehabilitation agency, an employment network, or a SWA; and

3.Mail the signed/dated IRS and ETA forms to the state workforce agency’s
WOTC Coordinator not later than 28 days after the new hire begins work.