As restaurants continue to reopen and struggle to find new employees, they may be leaving an untapped employee pool and lucrative tax planning opportunities on the table. The Work Opportunity Tax Credit is a federal tax credit for hiring individuals from a few targeted groups designated by the IRS. In general, employers can receive a credit up to 40% of $6,000 of wages paid per employee who meets the criteria.
A few of the targeted groups, which the employer can take the WOTC credit for, include:
- The formerly incarcerated or those previously convicted of a felony
- Residents in areas designated as empowerment zones or rural counties
- Individuals experiencing long-term unemployment
- Summer youth employees residing in an empowerment zone
If an employer hires an individual who fits one of these criteria, the credit calculation then depends on the hours worked by the employee in their first year. The employee needs to work at least 120 hours in the first year of employment for any credit to be calculated.
- If the employee works from 120 to 400 hours, the credit is calculated at 25% of wages, which are capped at between $3,000 and $24,000 depending on the target group
- If the employee works over 400 hours, the credit is calculated at 40% of wages, with the same applicable caps
After determining if an employee is eligible for this credit, an employer has 28 days from the employees first day of work to apply and receive certification that the employee qualifies as one of the targeted groups.
The Consolidated Appropriation Act of 2021 has extended this credit until December 31, 2025, so if you haven’t employed any qualified individuals yet, there is still opportunity to do so. One thing to note, if you have already taken advantage of the Employee Retention Credit, those wages cannot be used for this credit as well, so it is important to consult with your tax advisor on what would be more advantageous in your situation.
With the country reopening and those who have previously been on unemployment rejoining the workforce, this is a great time to take advantage of the Work Opportunity Tax Credit. If you believe you may qualify, contact your Henry+Horne advisor.