Tax Savings With the Work Opportunity Tax Credit

by C. Mark Colvin
CliftonLarsonAllen

Many employers do not take advantage of this advantageous federal tax credit program.

The Illinois Department of Employment Security (IDES) reports a steadily improving employment picture in central Illinois. That’s good news, and it could get even better with a boost from the Work Opportunity Tax Credit (WOTC), a federal program offering a tax credit from $1,200 to $9,600 when you hire qualified veterans, summer youth employees, ex-felons and other underrepresented groups.

The law authorizing the program expired at the end of 2014, but WOTC is on Congress’ “expected to be renewed” list, just as it has been for more than a decade. Washington has a way of waiting until the last minute to act, but it’s highly probable that a new authorization would be retroactive to January 1, 2015.

If you have claimed the credit in the past, you should continue to submit timely WOTC applications to the IDES—paperwork must be submitted within 28 calendar days of the employee’s start date. If you have not claimed the credit before, you may be interested to know that about 10 percent of new hires qualify for an average federal credit of $2,000 to $5,000. Unfortunately, many employers are not aware or do not take advantage of it.

How Does It Work?
WOTC allows employers to reduce their federal tax liability by up to $9,600 per new hire—more if you include Illinois incentives. For-profit businesses of all sizes can participate, and 501(c) nonprofits may qualify for hires from the veteran target groups. The credit applies to temporary, seasonal, part-time and full-time workers, but only for individuals who have never worked for the hiring organization previously.

Illinois also offers a state tax credit of $1,200 to $1,500 when you hire qualified ex-felons and veterans. Although the state program is separate from the federal WOTC, it uses the same filing paperwork and data to provide relief from Illinois income tax.

In order to claim the federal tax credit for a new hire in virtually any position, the employee must be a certified member of one of several targeted groups, including:

  • Recipients of short-term Temporary Assistance for Needy Families (TANF);
  • Qualified veterans (including disabled and unemployed vets);
  • Qualified ex-felons;
  • Designated community residents;
  • Vocational rehabilitation referrals;
  • Qualified summer youth workers;
  • Food stamp recipients;
  • Supplemental security income recipients; and
  • Long-term family assistance recipients.

Employers claim more than $1 billion in tax credits annually under the WOTC program, and thousands of men and women with significant barriers to employment are able to find meaningful work. It’s a win-win deal that benefits all who participate.

How to Apply

  1. Complete IRS Form 8850 by the day a job offer is made.
  2. Complete Department of Labor, Employment and Training Administration (ETA) Form 9061, or ETA Form 9062 if the employee has been conditionally certified as belonging to a WOTC target group by the IDES.
  3. Submit the completed and signed IRS and ETA forms to IDES. Forms must be submitted within 28 calendar days of the employee’s start date.
  4. Wait for a final determination from the IDES indicating whether the employee is a certified, eligible member of one of the WOTC target groups.
  5. After the target group employee is certified by the IDES, file for the tax credit with the IRS.

Keep an Eye on Washington
The federal government is not known for quick resolution, but WOTC renewal has been added to the Senate’s tax extender package and could be approved as soon as early fall. If history is any indicator, politics may delay approval until the end of 2015, but the law would potentially be made retroactive to include employees hired during any part of 2015. That means now is the time to gather data and complete paperwork so you are ready if (or when) a new WOTC authorization is passed.

A WOTC extension would likely give employers additional time to begin the certification process if they have not started already. It would also represent an opportunity to review internal hiring processes so all available WOTC potential is captured for future hires. Professional assistance can help you interpret WOTC provisions (including identification, verification, certification, calculation and reporting) and apply them to your hiring process to maximize the tax benefits. iBi

C. Mark Colvin is a regional leader in CliftonLarsonAllen’s Federal Tax Solutions practice and resides in Peoria. You can reach him at (309) 495-8754 or mark.colvin@claconnect.com.

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