Co-authored by Zach Castleman, Senior Accountant
From February to August, U.S. manufacturing employment declined by 720,000 due to adverse conditions caused by the COVID-19 pandemic. But the industry has been slowly recovering. The U.S. Bureau of Labor Statistics estimates that the sector's employment grew by roughly 403,000 jobs over the summer.
If your business has plans to rehire workers or expand its workforce, there's a valuable tax credit that you should consider: the Work Opportunity Tax Credit (WOTC). This tax break may be a limited time opportunity; however, unless Congress acts to extend it beyond 2020.
The WOTC has been around for decades in various forms. It was previously referred to as the "targeted jobs credit." The current version of this credit for hiring workers from disadvantaged groups was extended through 2020 by the Further Consolidated Appropriations Act.
Under current law, the WOTC generally equals first-year wages of up to $6,000 for each employee if he or she works at least 400 hours during the year. Therefore, the maximum credit is $2,400 per worker.
For disabled veterans, the credit may be claimed for the first $24,000 of wages. Therefore, the maximum credit is $9,600 for each disabled vet.
Important: Tax credits are more valuable than tax deductions. A credit reduces taxes dollar for dollar. A deduction reduces only the amount of income that's subject to tax.
There's no limit on the number of these credits a manufacturer can claim. Say your firm hires five WOTC-eligible workers while it ramps up operations in the fourth quarter of 2020. Your company can claim a total credit of $12,000 if each eligible employee is paid at least $6,000 in wages in 2020.
The list of targeted groups eligible for the WOTC has remained relatively stable over recent years with just a couple of tweaks. Currently, the WOTC is available for the following nine groups:
1. Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients. These are individuals who are part of a family receiving assistance from a state plan approved under Part A of Title IV of the Social Security Act relating to TANF.
2. Qualified veterans (including disabled veterans). A veteran must be unemployed for a period totaling at least four weeks (whether or not consecutive), but less than six months, in the one-year period ending on the hiring date, to be eligible for the WOTC.
3. Ex-felons. A "qualified ex-felon" is a person hired within a year of being convicted of a felony or being released from prison from the felony.
4. Designated Community Residents. These workers reside in an empowerment zone, enterprise community or renewal community. To be eligible for the WOTC, the workers must continue to live in the designated community after employment.
5. Vocational rehabilitation referrals. This category applies to a person who has a physical or mental disability and has been referred to the employer while receiving or upon completion of rehabilitative services pursuant to certain programs.
6. Supplemental Nutrition Assistance Program (SNAP) recipients. This covers individuals who are members of a family that received SNAP (food stamp) benefits for the previous six months or at least three of the previous five months.
7. Supplemental Security Income (SSI) recipients. A person is a qualified SSI recipient for this purpose for any month in which he or she received SSI benefits within 60 days of the hiring date.
8. Long-term family assistance recipients. This applies to individuals who are part of a family that receives assistance under a Title IV-A program.
9. Qualified long-term unemployment recipients. A qualified long-term unemployment recipient is someone who has been unemployed for not less than 27 consecutive weeks at the time of hiring and received unemployment compensation during some or all of the unemployment period.
In many cases, the WOTC may be available for hiring workers who lost their jobs due to the COVID-19 pandemic.
Important: The WOTC is also available for hiring youths aged 16 or 17 who reside in an empowerment zone or enterprise community for summer employment. This credit isn't available for any workers you hire between now and year end. However, you may be eligible to claim it for 2020 for any summer workers you previously hired.
The credit for eligible summer workers equals 40% of the first-year wages of $3,000, up to a maximum of $1,200, for a qualified youth working at least 400 hours. But it's limited to wages paid for work performed between May 1 and September 15.
Under current tax law, your company can't claim the WOTC for the following workers:
Before your company can claim the WOTC for a worker, you must first obtain certification that the individual is a member of the targeted group. Employers are instructed to file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Tax Credit, with their respective state workforce agency within 28 days after the eligible worker begins work. Eligible businesses claim the WOTC on their federal income tax return for the year of hire.
Under current law, the WOTC is scheduled to expire at the end of 2020. Both presidential candidates appear to support this credit. (See "Where Do the 2020 Presidential Candidates Stand?" at right.) But Congress — not the president — enacts tax law changes.
Extension of the credit beyond 2020 seems likely, but nothing can be taken for granted in in these tumultuous times. So, manufacturers should factor the credit into fourth-quarter hiring decisions and grab it while they can. If you have any questions please contact Victor Evans, Zach Castleman, or your VonLehman tax advisor.