How The Work Opportunity Tax Credit Can Help Business Owners
The Work Opportunity Tax Credit offers incentives to small business owners when they hire people from specific groups. This allows businesses to limit their tax liabilities, which can in turn positively affect their bottom line. Their resources can then be invested in the company and employees instead of in taxes. Additionally, employers are able to hire wonderful employees who can perform highly and who they may have not considered in the past.
The credit is for small businesses that hire employees from specific target groups, namely those that have had trouble getting employment in the past. This can include disabled people as well as veterans. The specific employment barriers that employees must meet are determined by the Department of Labor. Veterans are often included in the specifics, as well as people on financial assistance and those who live in specific areas of the country.
In order for a veteran to qualify your small business for the tax credit, certain criteria must be met. One of the following has to have taken place:
- One or more members of the family has to receive assistance from SNAP, which means that they are getting food stamps. They have to have been receiving this type of assistance for a mining of three months during the employee’s first year of employment.
- The employee was unemployed for a minimum of four weeks and a maximum of six months within one year (they do not need to be consecutive weeks or months) before being hired.
- The employee was unemployed for six months or more, whether or not consecutive, during the one-year term that ends on the date of hire.
- The employee is eligible for compensation for a disability connected to their military service and they are employed by the small business within one year from being released from the military.
The Tax Credit
The tax credit goes from $1,200 to $9,600 and is eligible to any employer who pays income tax in the 50 United States, as well as the U.S. Virgin Islands and Puerto Rico. The amount of the credit a small business owner will receive is based on a few factors, including the employee that was hired and how long they worked for the company.
Applying for the Tax Credit
In order to apply for the credit, the employer must first identity a new hire as eligible. The employee has to fill out Form 8850 from the IRS. Alternatively, there’s a pre-screening notice and certification request for the tax credit, which can be filled out by the employer. Form 9061 from the Department of Labor also has to be filed; alternatively, the ICF, or Individual Characteristics Form, can be filled out and filed. Ideally, the two necessary forms will be filed within 28 days of the employer’s hire date. This is the best way to have them considered eligible for the tax credit. These forms can be filed electronically, making the paperwork portion easier on the employee and employer.
In order to streamline the process for small businesses, it’s best to offer employees an e-signature option in order to expedite the processing of paperwork. The screening and paperwork process should be part of the new hire routine. Employers should also be flexible about where they carry out this screening – the most convenient option should be taken, whether that’s on paper, on the phone or online. Paperwork should be filed with the State Workforce Agency.
It’s important to maintain detailed employee records, specifically during their initial 28 days of employment. Hours and wages should be tracked and reported. Tracking employees in these ways will ensure that they can be correctly identified as being eligible for the tax credit. It will also help to figure out the amount of the tax credit your small business will receive.
The PATH Act
The PATH Act, which stands for Protecting Americans From Tax Hikes, was instated in 2015. This allows small businesses to claim the Work Opportunity Tax Credit for specific employees. Even if the employee was hired prior to the 2015 PATH Act, the small business is still eligible for the tax credit. The employee needed to have worked for the employer between 12/31/2014 and 1/1/2020. For small businesses that are tax exempt, the PATH Act allows them to claim the credit for veterans who were employed during this time frame. Additionally, the PATH Act also takes into account those who have received unemployment long-term.
Retroactive Tax Credit Opportunities
For new hires who were not screened during their first 28 days of employment, small businesses still have the opportunity to secure the tax credit. First, the employer has to identify and screen the employees who were not screened during their initial 28 days. Additionally, if employees were screened during their first 28 days of employment but the proper paperwork wasn’t filed, the paperwork should be filed as soon as possible.