What is WOTC?
The Work Opportunity Tax Credit (WOTC) is a federal tax credit that the government provides to private-sector businesses for hiring individuals from nine target groups that have historically faced significant barriers to employment. This government program offers participating companies up to $9,600 per new qualifying hire.
Under IRS regulations through FICA, employers in the food and beverage industry may be eligible for a credit for social security and Medicare taxes paid on their employees’ tip income.
Through geographic incentive credits, the federal government has also designated certain economically depressed areas as tax advantage areas. If your business is located in one of these areas and you employ individuals living in the same area, you can earn credit against your federal tax liability.
The federal government has also designated certain economically depressed areas as tax advantage areas through the Indian credits. If your business is located in one of these areas and you employ individuals living in the same area, you can earn credit against your federal tax liability.
How do I obtain these tax credits?
TC Services USA will provide the appropriate tax reports, depending on the type of credit earned, for the appropriate tax year. In some instances, for prior years where the tax returns have already been filed, the client will need to amend the return. For open tax years or the current year, the client will recalculate the tax liability by reducing the wage deduction by the amount of credit, include the information provided by TC Services USA on their return, and file the return.
These credits can be carried back to the previous year, applied in the tax year the credit was generated, or carried forward for twenty years.
How are the credits distributed?
If the business entity is a sole proprietorship, S-Corp, LLC, LLP or Partnership, the credit passes to the owner, shareholder, member or partner in the same manner as losses are allocated. In a C-Corp, the credits are used by the corporation. They offset federal income taxes and can be carried back to the prior year, or carried forward for twenty years.
Do businesses forfeit deductions by taking credits?
Yes. Businesses lose the deduction for wages in the amount of the credit, but are trading out a deduction for a credit that is much larger. For example, if an employee makes $4,000, which generates a $1,600 credit, the employer takes a $2,400 wage deduction along with the $1,600 credit.
The credit is much more valuable than the deduction. Our fee is also deductible.
What if the business isn’t paying taxes?
No problem. The WOTC will offset the AMT, and the EZ and RC credits will offset 25% of the AMT. If you are in a Net Operating Loss (NOL) and not paying taxes, the credit may be carried forward for twenty years.
Should I be concerned about discrimination as it relates to the questions asked?
These programs were established by the federal and state agencies so that companies to take full advantage of rewards for hiring from the targeted groups. The government was careful to design this program in a manner that does not discriminate based on any EEO classifications. That is why so many companies today are realizing millions of dollars in tax credits. The forms are also designed as a pre-screen and, therefore, can be used in assessing which job applicant to hire. Answering the questions is strictly voluntary.
Can my CPA do this for me?
If you are not completing an 8850 with each new hire, you are not processing for WOTC tax credits. This is more of an HR function, not an accounting function. It is hard for CPA’s to have all new hires complete IRS Form 8850 within twenty-eight days of their start date, and submit it with back-up documentation that is often required.
Can we do these credits in-house?
Some of our clients used to conduct this process in-house until they realized that they could achieve a more cost-effective approach by outsourcing these services. They earn a greater return while being able to redeploy their staff, and improve the amount of credits earned.
This seems like a lot of work for our HR department. Is that so?
By using our technology to pre-screen and process, paperwork becomes minimal, as HR must only submit paperwork for pre-qualified new hires. We also take on the burden of processing, tracking regulations, and identifying and calculating the credits. This is why TC Services USA was formed and has been so successful in achieving the maximum tax credit dollars for our clients.
Is my PEO (or employee leasing company) taking these credits, or can we get them?
According to the IRS, the “common law employer” is entitled to the tax credit. If the client does the hiring, firing, determines the pay and manages the day-to-day duties of the employee, they are the common law employer. Note: We do not get involved in this type of decision-making by the client. We simply arm them with information they need in order to discuss this matter with their CPA – there is documentation that can be sent to the client for additional information.