Employers Have More Time to Claim Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is a valuable benefit for employers who hire members of targeted groups, such as qualified veterans, summer youth employees, and individuals from low-income households. But the WOTC had temporarily expired for all but qualified veteran hires during 2012, until Congress retroactively restored it in early January of 2013.
Because of the confusion this caused, the IRS recently issued guidance that allows employers to claim the credit if they hired a member of a targeted group on or after January 1, 2012, through March 31, 2013, as long as they submit the form to their state workforce agency by April 29, 2013. Some restrictions apply.
"The filing extension is available to businesses of all size, and also to some tax-exempt entities," says Jim Andreucci, a manufacturing and distribution tax partner with CliftonLarsonAllen. "Employers should take this opportunity to review their hiring during 2012. There could be valuable tax credits to be recovered."
The basics of the work opportunity credit
The WOTC generally allows employers who hire members of targeted groups to claim a tax credit of $2,400 or more. The credit is computed as 40 percent of the first $6,000 of wages paid to a new hire who falls into one of nine disadvantaged groups.
- For-profit businesses have all nine categories available, and in some cases the credit can be greater than $2,400. The tax credit is an offset to income taxes, including any Alternative Minimum Tax.
- Tax-exempt employers can claim the credit for qualified veteran hires after November 21, 2011. For these employers, the credit is smaller, and is limited by a portion of payroll taxes paid by the employer for all employees. Tax-exempt employers are not able to claim the credit for the other targeted groups.
To claim the WOTC, an employer must generally submit a prescreening notice (IRS Form 8850) to the state workforce agency. This notice requests certification that the employee is a member of a targeted WOTC group, and must be submitted no later than the 28th day after the employee begins work.
Because of the confusion during 2012, some state workforce agencies were not processing requests for certification, and some employers, not knowing the status of the law, were not attempting to complete the Form 8850 pre-screening notice.
Extended certification procedures from the IRS
The IRS has provided transitional relief (IRS Notice 2013-14) to employers that hired members of any targeted group, except qualified veterans, between January 1, 2012, and March 31, 2013.
- These employers are deemed to have submitted their Form 8850 pre-screening notice for a new hire on time as long as it is submitted to their state workforce agency no later than Monday, April 29, 2013.
- Also, employers that hired qualified veterans between January 1, 2013, and March 31, 2013, have until April 29, 2013, to submit the Form 8850. No transitional relief is provided, however, for qualified veterans hired during calendar year 2012.
“This transitional window provides a great opportunity for employers to review their hiring over the last year, and determine whether any work opportunity tax credits could be available,” says Andreucci. “The instructions for IRS Form 8850 provide guidance on the nine targeted group categories and where to file the form. All employers who hired workers during 2012 should give this a look.”
How we can help
This extension of the WOTC paperwork procedures gives employers additional time to begin the certification process. It also represents an opportunity to review internal hiring processes to assure that, going forward, all available credits are pursued. Please contact your tax advisor if you want help interpreting these provisions and applying them to your hiring process.