The current labor market is tight — particularly in the construction industry.
Recently, the 2,700 contractors, construction managers, builders and trade contractors surveyed in the Commercial Construction Index reported having "difficultly" or "moderate difficulty" finding skilled workers. And according to a new survey from the Associated General Contractors of America, four of every five construction companies are having a hard time filling hourly and craft positions, which represent the bulk of the industry's workforce.
In this tough environment, contractors need to explore all their options. A recent tax law change suggests one potential labor source and provides a welcome tax break. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 extends a special tax credit through 2020 for businesses hiring workers from certain disadvantaged groups.
A Little Background
The Work Opportunity Tax Credit was introduced on October 1, 1996, to provide tax incentives to employers who hired individuals from specific target groups. (A previous, comparable credit was referred to as the "targeted jobs credit.") Historically, these groups — which include veterans, ex-felons and the long-term unemployed — have had a harder time finding work than other job-seekers.
Through the WOTC program, you can claim a tax credit for each qualified worker you hire. The credits are claimed as part of the general business credit and help reduce your federal income tax liability. Remember that a credit is more valuable than a deduction because it cuts the amount of tax due on a dollar-for-dollar basis.
Over the years, Congress has authorized the WOTC, allowed it to expire and then reinstated it several times. The recent legislation gives the WOTC, which was set to expire at the end of 2019, another year. Don't be surprised if the credit is again extended at the end of 2020!
Calculating the WOTC
In most cases, the WOTC is equal to a worker's first-year wages up to $6,000 if he or she works at least 400 hours during the year. The maximum credit is $2,400 per worker. However, if you hire a disabled veteran, the credit may be claimed for the first $24,000 of wages for a maximum of $9,600 per worker.
There's no limit on the number of credits you can claim. So, for example, if you hire five eligible workers who each qualify for a $2,400 credit in 2020, you can reduce your tax liability by $12,000. Hire 10 eligible workers, and you should be able to claim $24,000.
Currently, there are nine target groups eligible for the regular WOTC:
- Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients,
- Unemployed veterans, including disabled veterans,
- Designated community residents living in Empowerment Zones or Rural Renewal Counties,
- Vocational rehabilitation referrals,
- Food stamp (SNAP) recipients,
- Supplemental Security Income (SSI) recipients,
- Long-term family assistance recipients, and
- Qualified long-term unemployment recipients.
The last category is the newest, added on January 1, 2016. It includes individuals who have been out of work for at least 27 weeks and have received state or federal unemployment benefits during all or part of that period.
You may also be able to claim a "summertime credit" for hiring youths aged 16 or 17 that reside in an Empowerment Zone or Enterprise Community. This credit is equal to 40% of the first-year wages of $3,000, for employees working at least 400 hours. It's limited to wages paid for services performed between May 1 and September 15 and maxes out at $1,200.
Note that you can't claim the WOTC for certain workers, even if they otherwise qualify for one of the disadvantaged groups. The following individuals are non-eligible:
- Majority owners of the business.
- Relatives or dependents of owners — including children, stepchildren, spouses, parents, siblings, step-siblings, nephews, nieces, uncles, aunts, cousins and in-laws.
- Former employees, regardless of how long it's been since they last worked for the company.
Summer youths who worked for you in the past are not considered former employees and are, therefore, WOTC-eligible.
Obtain Certification First
Before you can claim the WOTC on your tax return, you'll need to obtain certification that new hires are members of the target groups. File IRS Form 8850, "Pre-Screening Notice and Certification Request for the Work Opportunity Credit," with your state's workforce agency within 28 days after the eligible worker begins employment. Or contact us for filing assistance.