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Welfare-to-Work and Work
Opportunity Tax Credit tax credits allow employers the opportunity to earn a
tax credit while seeking and hiring new employees.
Under the Internal
Revenue Code, employers can take a Welfare-to-Work tax credit on the first
$20,000 of eligible wages paid to a qualified long-term family assistance
(AFDC or successor program) recipient during the first two years of
employment. The credit is 35% of the first $10,000 of eligible wages in the
first year of employment and 50% of the first $10,000 of eligible wages in
the second year of employment. The maximum credit is $8,500 per qualified
employee.
Qualified long-term
family assistance recipients are: (1) members of a family that has received
family assistance for at least 18 consecutive months ending on the hiring
date; (2) members of a family that has received family assistance for a
total of at least 18 months (whether or not consecutive) after the date of
enactment of this credit if they are hired within 2 years after the date
that the 18-month total is reached; and (3) members of a family who are no
longer eligible for family assistance because of either federal or state
time limits, if they are hired within 2 years after the federal or state
time limits made the family ineligible for family assistance.
The Work Opportunity Tax
Credit (WOTC) is available on an elective basis for employers who hire
individuals from one of eight targeted groups. The credit equals 40% of
qualified wages (reduced to 25% for employment of 400 hours or less). The
term "qualified wages" generally means wages attributable to
service rendered by a member of a targeted group during the one-year period
beginning with the day the individual began work for the employer.
The maximum credit that
you can take per eligible employee is $2,400 (40% of the first $6,000 of
qualified first-year wages). For qualified summer youth employees, the
maximum credit is $1,200 (40% of the first $3,000 of qualified first-year
wages). The employer's regular deduction for wages paid is reduced by the
amount of the credit. You should note, however, that the IRS will not permit
a credit to be taken for wages paid to an employee who works less than 120
hours in the first year of employment.
To take the credit, the
employee you hire must be from one of these targeted groups: (1) families
eligible to receive benefits under the Temporary Assistance for Needy
Families (TANF) program; (2) high-risk youth; (3) qualified ex-felons; (4)
vocational rehabilitation referrals; (5) qualified summer youth employees;
(6) qualified veterans; (7) families receiving food stamps; and (8) persons
receiving certain Supplemental Security Income (SSI) benefits.
Once you have found an
employee that you believe is eligible for the credit, in order to take the
credit you must complete IRS Form 8850, Pre-Screening Notice and
Certification Request for the Work Opportunity and Welfare-to-Work Credits,
and file with the WOTC coordinator for your state no later than the 21st day
after the employee begins working for you. In addition, there is a form that
you will need to obtain from the Department of Labor with respect to the
employee that also must be sent to the WOTC coordinator for your state along
with Form 8850.
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