Employer Tax Credits Explained

Many clients have asked us to explain the different tax credits available as of this year (2013). I present to you many of the details associated with the credits. Always ask your tax adviser for more information on your particular situation:

Employers can qualify for a tax credit known as the work opportunity tax credit that is worth as much as $2,400 for each eligible employee ($4,800, $5,600 and $9,600 for certain veterans and $9,000 for “long-term family assistance recipients”). The credit is generally limited to eligible employees who began work for the employer before Jan. 1, 2012 (who begin work for the employer before Jan. 1, 2013 for eligible employees who are qualified veterans). The credit, calculated as described below, is available on an elective basis for employers hiring individuals from one or more of 9 targeted groups.

Generally, an employer is eligible for the credit only for qualified wages paid to members of a targeted group. These groups are: (1) qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program, (2) qualified veterans, (3) qualified ex-felons, (4) designated community residents, (5) vocational rehabilitation referrals, (6) qualified summer youth employees, (7) qualified members of families in the Supplemental Nutritional Assistance Program (SNAP), (8) qualified Supplemental Security Income recipients, or (9) long-term family assistance recipients.

For each employee, there is also a minimum requirement that the employee must have completed at least 120 hours of service for the employer.

Also, the credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of a trade or business of the employer (e.g., working as a maid in the employer’s home).

Additionally, the credit generally isn’t available for employees who have previously worked for the employer.

For employees other than summer youth employees, the credit amount is calculated under the following rules. The employer can take into account up to $6,000 of first-year wages per employee ($10,000 for “long-term family assistance recipients”; $12,000, $14,000 or $24,000 for certain veterans). If the employee completed at least 120 hours but less than 400 hours of service for the employer, the wages taken into account are multiplied by 25%. If the employee completed 400 or more hours, all of the wages taken into account are multiplied by 40%. Thus, under the above rules, the maximum credit available for the first-year wages is $2,400 ($6,000 x 40%) per employee ($4,000 [$10,000 x 40%] for “long-term family assistance recipients”; $4,800, $5,600 or $9,600 [$12,000, $14,000 or $24,000 x 40%] for certain veterans). Additionally, for “long-term family assistance recipients”, there is available a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000 [$10,000 x 40% plus $10,000 x 50%). The “first year” referred to above is the year-long period which begins with the employee’s first day of work, and the “second year” is the year that immediately follows.

For summer youth employees, the rules in the preceding paragraph apply, except that the employer can only take into account up to $3,000 of wages, and the wages must be paid for services performed during any 90-day period between May 1 and Sept. 15. Thus, for summer youth employees, the maximum credit available is $1,200 ($3,000 x 40%) per employee.

You should be aware that (1) no deduction is allowed for the portion of wages equal to the amount of the work opportunity credit determined for the tax year; (2) other employment-related credits are generally reduced with respect to an employee for whom a work opportunity credit is allowed; and (3) the credit is subject to the overall limitations on the amount of business credits that can be taken in any tax year, but a 1-year carry back and 20-year carry forward of unused business credits is allowed. Because of these three rules, there may be circumstances in which the employer might, under an available election, elect not to have the work opportunity credit apply.

You should also be aware that there are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of the credit.

I welcome your questions about any of the above discussion, and, should you be interested, I would be pleased to work with you on the application of the credit to your situation.

Very truly yours,

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Work Opportunity Tax Credit Extended

The work opportunity tax credit (WOTC) allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). Where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages; it’s 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For LTFA recipients, it includes an additional 50% of qualified second-year wages.

The maximum WOTC for hiring a qualifying veteran generally is $6,000. However, it can be as high as $12,000, $14,000, or $24,000, depending on factors such as whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the WOTC-eligible hiring date.

Under pre-Act law, wages for purposes of the WOTC didn’t include any amount paid or incurred to: (1) a non-veteran who began work after Dec. 31, 2011; or (2) a veteran who began work after Dec. 31, 2012.

New law. The 2012 Taxpayer Relief Act retroactively extends the WOTC so that it applies to eligible veterans and nonveterans who begin work for the employer before Jan. 1, 2014. (Code Sec. 51(c)(4)(B), as amended by Act Sec. 309)

http://checkpoint.riag.com/static/9.9.0104/v10/images/doc/check.jpgRIA observation: Thus, the 2012 Taxpayer Relief Act grants a two-year lease on life for the WOTC for eligible nonveterans, and a one-year lease on life for the WOTC for qualifying veterans.