Closely Held Business Advisor: IRS Guidance for Employers Who Plan to Claim the WOTC

July 7, 2016

The Work Opportunity Tax Credit encourages employers to hire individuals who are qualified for open positions and are members of a “target group.”

The IRS has granted on March 28, 2016, and again on June 17, 2016 “transitional relief” to eligible employers who are planning to claim the Work Opportunity Tax Credit (WOTC). The relief outlined in IRS Notices 2016-22 and 2016-40 comes in the form of an extended deadline — until September 28, 2016 — to file a form necessary to claim the credit for certain eligible workers.

Background

The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) extended the WOTC through 2019. The credit is for employers that hire individuals who are members of a “target group.” The PATH Act also expanded the credit beginning this year to apply to employers that hire qualified individuals who have been unemployed for 27 weeks or more.

The amount of the tax 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 tax credit that can be earned for each member of a target group is generally $2,400 per adult employee. The credit can be as high as $9,600 per qualified veteran. Employers aren’t subject to a limit on the number of eligible individuals they can hire. In other words, if there are 10 individuals that qualify, the credit can be 10 times the amount listed.

Qualifications

Employers that hired targeted group members can claim the tax credit as a general business credit against their income tax. (Nonprofit organizations may be eligible for a credit against their payroll tax liabilities and owners of pass-through entities can also claim the tax credit as a pass-through general business credit against their income tax.) However, before an employer can claim the credit, it must obtain certification from a “designated local agency” (DLA) that the hired individual is indeed a targeted group member.

An employee isn’t treated as a member of a targeted group for WOTC purposes unless the employer obtains certification from the DLA that the employee is a member or the employer completes 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 the employer. The IRS has now extended the deadline to September 28, 2016.

September 28 is also the extended deadline for employers that hired (or hire) long-term unemployment recipients between January 1, 2016, and August 31, 2016, as long as the individuals start work for that employer on or after January 1, 2016, and on or before August 31, 2016. For long-term unemployment recipients hired on or after September 1, Form 8850 must be submitted by the 28th calendar day after the individual begins work.

An employer also must submit a Department of Labor Employment and Training Administration (ETA) Form 9061 (“Individual Characteristics Form”) or 9062 (“Conditional Certification”) to the DLA.

Form 8850 Modified

In light of the guidance in Notice 2016-22, the federal government is modifying Form 8850 and ETA Forms 9061 and 9062 so that employers can use them to request certification from the DLAs for qualified long-term unemployment recipients. Those modified forms and instructions will indicate the information that must be provided in order for the employer to receive certification from the DLA that the individual is a qualified long-term unemployment recipient.

The IRS anticipates that the modified forms will include a requirement that the individual signing the form attest that he or she meets the requirements to be a qualified long-term unemployment recipient and a requirement that the individual attest to the period(s) during which the individual was unemployed and received unemployment compensation.

Take Action Soon

The WOTC can lower your company’s tax liability when you hire qualified new employees. However, a timely request for certification doesn’t eliminate the need to receive a certification before claiming the credit. For help with interpreting the rules to determine whether an employee qualifies, calculating the applicable credit and answering other questions you might have, contact your Elliott Davis Decosimo advisor or a member of our tax team.