The Consolidated Appropriations Act (CAA) gives employers another shot at a valuable tax credit that was scheduled to go off the books at the end of 2020. It extends the Work Opportunity Tax Credit (WOTC), which had expired and been reinstated numerous times in the past, for a period of five years. In the past, extensions have only lasted for one or two years.
Therefore, an employer may benefit from the WOTC on the 2020 return it will be filing in 2021 as well as during the next five years—at least. Of course, Congress could change its mind again.
Background: The WOTC is available to employers that hire workers from certain disadvantaged “target groups” of individuals. Generally, the credit equals 40% of the first $6,000 of the employee’s first-year wages, for a maximum credit of $2,400 per worker. However, for a veteran with a service-connected disability, the credit can be claimed on the first $24,000 of wages, for a maximum of $9,600 per worker
There is no overall limit on the employer’s credit amount. For instance, if your firm hires five qualified workers, the maximum total credit is $12,000, a dollar-for-dollar reduction of your tax bill.
The list of target groups includes the following.
- Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients: These individuals are part of a family receiving assistance from a state plan approved under Part A of Title IV of the Social Security Act relating to TANF. The assistance must have been received for any nine-month period during the 18-month period before hire.
- Qualified veterans (including disabled veterans): The veteran must be unemployed for at least four weeks (whether or not consecutive), but less than six months in the one-year period ending on the hiring date.
- Ex-felons: A qualified ex-felon is a person hired within a year of being convicted of a felony or being released from prison.
- Designated Community Residents (DCRs): The worker must reside in an empowerment zone, enterprise community or renewal community and continue to live there after employment.
- Vocational rehabilitation referrals: This applies to someone with a physical or mental disability that has been referred to the employer during or after rehabilitative services under certain programs.
- Supplemental Nutrition Assistance Program (SNAP) recipients: This covers members of a family that received SNAP benefits for the previous six months or at least three of the previous five months.
- Supplemental Security Income (SSI) recipients: A person is a qualified SSI recipient for any month in which he or she received SSI benefits within 60 days of the hiring date.
- Long-term family assistance recipients: This applies to family members that receive assistance under a Title IV-A program.
- Qualified long-term unemployment recipients. A qualified long-term unemployment recipient is someone who has been unemployed for not less than 27 consecutive weeks at the time of hiring and received unemployment compensation during this time.
Finally, your business may qualify for a special summertime credit for hiring youths aged 16 or 17 residing in an empowerment zone or enterprise or renewal community. This credit is 40% for the first $3,000 of wages paid between May 1 and September 15, up to a maximum of $1,200 per qualified worker.
Caution: The WOTC requires a complex certification process. Obtain expert professional guidance to secure the maximum credit for your business.