It is no secret that employers are having a hard time finding qualified workers. The so-called “Trump Bucks” and “Biden Bucks” provided workers with a financial lifeline during the ongoing pandemic. Some workers have simply decided it is better to accept public assistance rather than earn their keep. However, there is hope for employers seeking hardworking employees in the form of the renewed tax credit. This credit is available to employers that hire individuals who have received unemployment benefits for an extended period of time.
The renewed tax credit is also applicable to other types of workers who have specific barriers to employment as detailed below. The purpose of the renewed tax credit is to convince employers to hire individuals who have not contributed much (or anything) to society in recent months and years while receiving public assistance.
The Benefits of the Tax Credit
The renewed tax credit, also known as the WOTC, short for Work Opportunity Tax Credit, has been extended all the way through 2025. If the credit works, it will persuade employers to hire individuals from specific groups that find it difficult to obtain employment for various reasons. Individuals who have been unemployed for 27 or more weeks and received unemployment benefits qualify as members of the targeted group.
Additional groups that qualify for the tax credit include those who are veterans and unemployed, individuals who were incarcerated in the past, vocational rehab referrals, long-term recipients of family assistance, supplemental security income recipients and supplemental nutrition assistance program recipients. Even certain community residents who reside in rural renewal counties and empowerment zones qualify as members of the targeted groups.
Employer Qualification Requirements
Employers who hire an individual in one of the targeted groups detailed above cannot simply make a phone call to the IRS to receive the tax benefit. Rather, these businesses are to request certification through the submission of the IRS Form 8850, also known as the Pre-Screening Notice and Certification Request for the tax credit. This form is submitted to the state workforce agency as opposed to the IRS itself. The form is to be submitted in 28 days or less from the point at which the eligible employee commences labor.
Every business owner and manager should be aware that a special relief provision has extended the renewed tax credit deadline to November 8, 2021 for certain new hires. The hires who qualify for this extended deadline include individuals residing in empowerment zones and qualified summer youth employees residing in such zones. As long as individuals in these groups begin working on or after the first of the year and prior to October 9, their employment sets the stage for employer qualification.
The Tax Return
If your business is eligible for the WOTC tax credit, it must be claimed on your company’s federal income tax return. This qualification is contingent on wages paid to workers who are eligible in their initial year of employment, meaning employment in the years that follow does not qualify the business for the credit. The credit is calculated on Form 5884 and subsequently claimed on the General Business Credit Form 3800.
What About Tax-exempt Organizations?
It must be noted tax-exempt organizations that claim the credit will not receive it. The vast majority of new hires at tax-exempt organizations’ do not qualify for the credit, meaning the credit rarely helps such organizations offset payroll taxes.
Address all Questions and Concerns Before Claiming the Tax Credit
If you have any questions as to whether your business qualifies for the tax credit, do not claim it assuming you will automatically qualify without IRS scrutiny. Consult with your tax advisor and/or surf the web on over to www.IRS.gov for more information. The IRS website has a litany of tools available to help employers solve tax-related problems, address concerns and submit tax credit information.
As is often said, it is better to be safe rather than sorry. Err on the side of caution, do your homework in regard to whether your business qualifies for the renewed tax credit and you will be able to move forward in full confidence when adding employees, claiming the credit and paying your taxes.