small business TAX BRIEF FOR February 20
Tax credit for hiring from certain “target groups” can provide substantial tax savings
Many businesses hired in 2017, and more are planning to hire in 2018. If you’re among them and your hires include members of a “target group,” you may be eligible for the Work Opportunity tax credit (WOTC). If you made qualifying hires in 2017 and obtained proper certification, you can claim the WOTC on your 2017 tax return.
Whether or not you’re eligible for 2017, keep the WOTC in mind in your 2018 hiring plans. Despite its proposed elimination under the House’s version of the Tax Cuts and Jobs Act, the credit survived the final version that was signed into law in December, so it’s also available for 2018.
“Target groups,” defined
Target groups include:
- Qualified individuals who have been unemployed for 27 weeks or more,
- Designated community residents who live in Empowerment Zones or rural renewal counties,
- Long-term family assistance recipients,
- Qualified ex-felons,
- Qualified recipients of Temporary Assistance for Needy Families (TANF),
- Qualified veterans,
- Summer youth employees,
- Supplemental Nutrition Assistance Program (SNAP) recipients,
- Supplemental Security Income benefits recipients, and
- Vocational rehabilitation referrals for individuals who suffer from an employment handicap resulting from a physical or mental handicap.
Before you can claim the WOTC, you must obtain certification from a “designated local agency” (DLA) that the hired individual is indeed a target group member. You must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” to the DLA no later than the 28th day after the individual begins work for you. Unfortunately, this means that, if you hired someone from a target group in 2017 but didn’t obtain the certification, you can’t claim the WOTC on your 2017 return.
A potentially valuable credit
Qualifying employers can claim the WOTC as a general business credit against their income tax. The amount of the credit depends on the:
- Target group of the individual hired,
- Wages paid to that individual, and
- Number of hours that individual worked during the first year of employment.
The maximum credit that can be earned for each member of a target group is generally $2,400 per employee. The credit can be as high as $9,600 for certain veterans.
Employers aren’t subject to a limit on the number of eligible individuals they can hire. In other words, if you hired 10 individuals from target groups that qualify for the $2,400 credit, your total credit would be $24,000.
Remember, credits reduce your tax bill dollar-for-dollar; they don’t just reduce the amount of income subject to tax like deductions do. So that’s $24,000 of actual tax savings.
Offset hiring costs
The WOTC can provide substantial tax savings when you hire qualified new employees, offsetting some of the cost. Contact us for more information.