A small business that hires members of targeted groups can earn special tax credits worth up to $8,500 per employee.
By Milton Zall
As a small-business owner, you can earn tax credits from $1,500 to $8,500 per employee by taking advantage of the Work Opportunity Tax Credit (WOTC) and the Welfare to Work (WtW) Tax Credit. Although the laws authorizing these credits expired last year, in late 1999 Congress voted to extend them through the end of 2001.
To qualify for the WOTC credit, the employee must belong to one of the eight target groups listed below. The WOTC program offers employers a federal tax credit of up to $2,400, or 40 percent of the first $6,000 of wages paid in the first year of employment. The credit is applied against federal taxes by filing IRS Form 5884.
Here are the eight target groups:
High-risk youth. Someone between the ages of 18 and 25 who lives in a federal Empowerment Zone or Enterprise Community. To determine whether an address falls in an EZ/EC, visit the Housing and Urban Development Department's Web site at www.hud.gov/ezec/locator.
Summer youth employee. An individual who works for the employer between May 1 and September 15, has attained age 16 but not 18 on the hiring date, has never worked for the employer before, and lives in a federal Empowerment Zone or Enterprise Community.
Supplemental Security Income (SSI) recipients. People who have received payments under the SSI program, administered by the Social Security Administration (www.ssa.gov).
Vocational rehabilitation referrals. Individuals with a physical or mental disability that results in a substantial handicap to employment and are referred to the employer after completing rehabilitation services under a state program approved by the Department of Veterans Affairs.
Ex-felons. Those who have been convicted of a felony under federal or state law, hired within one year of latest conviction or release from prison and with a family income that falls below the poverty threshold established by the Labor Department.
Temporary Assistance for Needy Families recipients. Employees who belong to a family receiving assistance under a plan of the Aid to Families with Dependent Children (AFDC) program. Generally, assistance must have been received for at least nine months during the 18-month period ending on the hiring date.
Veterans. Those who served on active duty in the U.S. Armed Forces for more than 180 days. The veteran must be a member of a family receiving AFDC for at least nine months during the 21-month period prior to being hired or Food Stamps for three of the 15 months prior to being hired.
Food-Stamp recipient. An individual who has attained age 18 but not age 25 and is a member of a family that received Food Stamps for the six-month period ending on the hiring date or a family that is no longer eligible but received Food Stamps in three of the five months ending on the hiring date.
The Welfare to Work (WtW) credit encourages the hiring of long-term welfare recipients. Business owners can claim a temporary credit of up to $8,500 per employee for wages paid to former long-term welfare recipients during the first two years of their employment.
Specifically, employers are entitled to a 35 percent credit for the first $10,000 of eligible wages paid in the first year and a 50 percent tax credit for the first $10,000 in wages paid in the second year of employment.
If a company hires someone who appears to be a member of a targeted group, a company official and the job applicant should complete IRS Form 8850 on the day of job offer. The company must submit it for certification, along with Labor Department ETA Form 9061, to a state employment agency that coordinates the WOTC program.
To locate the agency in your state, and for detailed information about the form, visit the Department of Labor WOTC Web site at www.doleta.gov/employer/wotc.htm.
Make sure all forms are mailed within 21 days of the new hire's start date.
If the employee qualifies, the state agency will certify the employee's membership in the targeted group and will notify you. There is no guarantee that the person you hire will check out satisfactorily, so make sure that person is someone you would hire even if you received no tax credit.
If you hired someone after the credits expired on July 1, 1999, but before they were later reinstated, and you believe the employee qualifies for a credit, request retroactive certification by completing the necessary forms and submitting them to your state WOTC coordinator.
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