According to the U.S. Bureau of Labor Statistics’ October 2020 report, there are currently 11.1 million unemployed. With the abundance of available skilled labor, there is a question on how to incentivize the businesses capable of hiring to do so. The often-overlooked Work Opportunity Tax Credit (WOTC) is a tool all employers should consider as it helps ease the capital requirements of new hires.

The WOTC is a Federal tax credit that helps facilitate access to employment for workers while providing capital relief to employers. The credit aims to assist targeted groups who have consistently faced significant barriers to employment. These targeted groups include:

  • Qualified IV-A Recipients
  • Qualified veterans
  • Qualified ex-felons
  • Designated Community Residents
  • Vocational Rehabilitation Referral
  • Summer Youth Employee
  • Qualified Supplemental Nutrition Assistance Program (SNAP) recipients
  • Supplemental Security Income recipients
  • Long-Term Family Assistance recipients
  • Qualified Long-Term Unemployment Recipients

This year, in particular, the benefits may be more widely available because of the number of individuals that have been unemployed because of the pandemic. So, what are the requirements to be considered “long-term unemployed” and what are the benefits employers can expect?

Requirements:

  • Individual must be unemployed for no less than 27 consecutive weeks
  • Individual must have received unemployment compensation during some or all the unemployment period
  • Once hired the employee must work at least 120 hours during the first year of employment to derive any WOTC benefits for the employer

Benefits:

  • If the employee works for at least 120 hours but less than 400 hours during the first year of employment the employer is eligible to receive a credit equal to 25% of the employee’s qualified wages up to a maximum credit of $6,000.
  • If the employee works for at least 400 hours during the first year of employment the employer is eligible to receive a credit equal to 40% of the employee’s qualified wages up to a maximum credit of $6,000.
  • Note: although the maximum credit is the same in both scenarios the driving force between the two is the multiplier of 25% vs 40% and the amount of qualified wages paid.

Employers who hire from any of the targeted groups, especially the long-term unemployed, must obtain certification from the state agency within 28 days of employment which will ensure eligibility and ultimate success of the WOTC.

Currently, this credit is set to expire on December 31, 2020, with no extension in the works. The administrative steps required to successfully claim the WOTC can be complex and due to the fast-approaching deadline to hit the requirements, it is best to consult your WG tax advisor.