Small Business Taxes & ManagementTM--Copyright 2009, A/N Group, Inc.
The work opportunity tax credit (WOTC) provides employers a credit for wages paid to individuals in certain targeted groups. The credit has been around for a number of years, but has evolved over the years and recently been expanded. The credit is generally equal to 40 percent of the first $6,000 of qualified wages paid to an employee in the targeted group during the first year of employment. Only $3,000 of qualified wages apply for qualified summer youth. The credit rate is only 25 percent for employees who have completed a minimum of 120 hours, but not the full 400 or more hours of service required for the full credit rate (40 percent).
Targeted groups include:
The employee must be certified by an authorized local agency prior to the individual's first day of work or the employer must file an application with 28 days of the first work day. There are other requirements, so check with your tax adviser. Any credit taken reduces the business's wage deduction.
Example--Madison Inc. hires Fred Flood, a qualified veteran (but without a service-connected disability). During the first year of employment, Fred works a total of 1,000 hours at $14 per hour, for total wages of $14,000. Fred has 400 or more hours in the first year so the wage credit is 40 percent. Since only the first $6,000 qualifies, Madison's credit is $2,400. Madison can only deduct $11,600 ($14,000 less $2,400) of Fred's wages. However, Madison is an S corporation with Sue Wells as the sole shareholder and Sue is in the 25 percent tax bracket. The lost $2,400 in wage deduction costs Sue $600 ($2,400 X 0.25), but the credit saves her $2,400 in taxes. Thus, the credit provides her with a net tax saving of $1,800.
Businesses planning to claim the newly-expanded work opportunity tax credit (WOTC) for eligible unemployed veterans and unskilled younger workers hired during the first part of 2009 have until Aug. 17 to request the certification required for these workers.
Newly-revised Form 8850, now available on IRS.gov, is used by employers to request certification from their state workforce agency. The American Recovery and Reinvestment Act, enacted in February, added unemployed veterans returning to civilian life and “disconnected youth” to the list of groups covered by the credit. Though eligible unemployed veterans and disconnected youth who begin work anytime during 2009 or 2010 may qualify a business for the credit, certification by the state workforce agency is required.
In general, an unemployed veteran is a person discharged or released from the military during the five years preceding the hiring date who received unemployment benefits for at least four weeks during the one-year period ending on the hiring date. A “disconnected youth” is a person age 16 to 24 on the hiring date who has not been regularly employed or attending school and who meets other requirements.
The WOTC offers tax savings to businesses that hire workers belonging to any of 12 targeted groups, including unemployed veterans and disconnected youth. The other 10 include people ages 18 to 39 living in designated communities in 43 states and the District of Columbia, Hurricane Katrina employees, recipients of various types of public assistance, and certain veterans, summer youth workers and ex-felons. The instructions for Form 8850 detail the requirements for each of these groups.
The certification requirement applies to all groups of workers except employees who were Hurricane Katrina victims. Normally, a business must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. But under a special rule, businesses have until Aug. 17, 2009, to file this form for unemployed veterans and disconnected youth who begin work on or after Jan. 1, 2009 and before July 17, 2009. Notice 2009-28, posted on IRS.gov, and the instructions for Form 8850 provide details on this special rule.
Copyright 2009 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 05/28/09