One of the major current initiatives in Washington DC is creating a “jobs bill” to incent small and mid-sized business to begin hiring. Much of the discussion surrounds tax credits for hiring additional workers above and beyond the headcount before the effects of the recession. Among the recommendations are exempting businesses from the 6.2% social security tax if they hire unemployed workers and tax credits of up to $5,000 for hiring and keeping unemployed workers for a minimum of one year.
What will the legislation look like?
Well it’s anybody’s guess given the infighting between the Democrats and Republicans. But you don’t have to wait for the politicians to figure it out. If you are a small or mid sized business, there are credits in place today that can provide real cost savings to your company. One is the Work Opportunity Tax Credit (WOTC).
Up to 20% of all new hires qualify for some federal, state or local tax credit. Unfortunately, many companies are unaware or don’t apply for the credit and as a result millions of dollars of potential savings are forfeited each year.
Who is eligible?
As with most government programs, the requirements for eligibility are detailed and complicated. In general, these groups apply:
- Short- and long-term recipients of Temporary Assistance for Needy Families (TANF) benefits
- Veterans who are disabled or unemployed, or receive food stamps
- Ex-felons hired within one year after conviction or release from prison
- Individuals age 18 to 39 who live in empowerment zones, enterprise communities or renewal communities (“designated communities”)
- Disabled individuals referred after completion of a qualified vocational rehabilitation program
- Summer youth employees age 16 and 17 who live in designated communities and work at least 90 days between May 1 and Sept. 15
- Individuals age 18 to 39 who receive food stamps
- Individuals receiving Supplemental Security Income (SSI) benefits
- “Disconnected youth” age 16 to 24 who aren’t in school, employed or readily employable due to a lack of basic skills
Each group has specific requirements so it is not a given they will automatically qualify. For example, unemployed veterans must have been discharged from active duty within five years before the hire date and have received unemployment compensation for at least four weeks during the one-year period ending on the hire date.
How are the credits calculated?
The credit reduces the employer’s wage deduction dollar-for-dollar. The reduction is required even if you can’t take the full amount of the credit in the current year and must carry it back or forward.
For most targeted groups, the maximum credit is 40% of first-year wages up to $6,000 (a maximum credit of $2,400). For disabled veterans, the maximum credit is 40% of first-year wages up to $12,000 (a maximum credit of $4,800).
And for summer youth employees, the maximum credit is 40% of first-year wages up to $3,000 (a maximum credit of $1,200).
For long-term TANF recipients, the maximum credit is 40% of first-year wages up to $10,000 (a $4,000 credit), plus 50% of second-year wages up to $10,000 (a $5,000 credit, so there’s a maximum credit of $9,000 over a two-year period).
Formerly known as the welfare-to-work credit, this credit was combined with the WOTC a few years ago.
The maximum WOTC is available for employees who work 400 hours or more during their first year of employment. A partial credit equal to 25% of qualifying wages is available for those who work between 120 and 399 hours.
How do you get the credit?
Forms need to be completed and filed when hiring a qualified employee. When the employee works the requisite number of hours, the employer claims the credit on the company’s new income tax return.
Sounds complicated? Well, this is a government program we are talking about. But here’s the good news. There are third party companies who will manage the entire process for you on a success fee basis only. They take a percentage of the credit if the credit is approved – and they handle the entire administrative process. No upfront costs, no processing fees, they only get paid if you get the credit.
Centripetal Consulting Group can help your organization connect with the right vendor to manage the process for you. To learn more and start saving, contact us today.