BGBC Partners, LLP Tax Update: Work Opportunity Credit
You may have heard that the IRS extended the work opportunity tax credit for employees hired before January 1, 2020. We thought this might be a great time to provide a brief refresher of the work opportunity tax credit.
Employers can qualify for a tax credit known as the work opportunity tax credit that can range from $2,400 to $9,600 depending on the targeted group and the amount of wages paid. The credit is generally limited to eligible employees who began work for the employer before Jan. 1, 2020. The credit, calculated as described below, is available on an elective basis for employers hiring individuals from one or more targeted groups.
An employer is eligible for the credit only for qualified wages paid to members of a targeted group. These groups are:- Qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program
- Qualified veterans
- Qualified ex-felons
- Designated community residents
- Vocational rehabilitation referrals
- Qualified summer youth employees
- Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP)
- Qualified Supplemental Security Income recipient
- Long-term family assistance recipient
- Beginning in 2016, long-term unemployed individuals.
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 × 40%) per employee ($4,000 [$10,000 × 40%] for "long-term family assistance recipients"; $4,800, $5,600 or $9,600 [$12,000, $14,000 or $24,000 × 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 × 40% plus $10,000 × 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 × 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 carryback and 20-year carryforward 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.
Contact your CPA to help you work through these rules. You may be able to help employ certain disadvantaged individuals, while lowering your taxes. A win-win for all!
BGBC Partners, LLP is a full service certified public accounting and business consulting practice.
For more information, contact Brad Bell, CPA or Steve Reed, CPA/ABV/CFF at BGBC Partners, LLP (317-633-4700).
