Hiring remains challenging this summer, especially if you’re in the hospitality industry. If you step outside your comfort zone and hire kids from disadvantaged backgrounds, you can get a tax credit. It’s called the Work Opportunity Tax Credit.
The WOTC is part of the general business credit, and is provided under IRC § 51. It’s jointly administered by the IRS and the Department of Labor.
Who qualifies?
Work experience is crucial for all kids, but not every kid will qualify for the WOTC. Qualified summer youth employees:
- Are 16 or 17 years old on the later of the hiring date or May 1
- Work for you between May 1 and Sept. 15 (i.e., you didn’t employ them before May 1)
- Reside in an empowerment zone.
The instructions to Form 8850 list the empowerment zones. The DOL also has a tool to help you locate empowerment zones.
How much is the credit?
For qualified summer youth, the credit is 40% of the first $3,000 in wages paid to those who work at least 400 hours during any 90-day period between May 1 and Sept. 15. Maximum credit: $1,200. A 25% credit—$750—is available if they work at least 120 hours, but fewer than 400 hours.
How do employers claim the credit?
You have to jump through some hoops to claim this credit—first you must prescreen employees and then you claim the credit.
Step 1: By their first day of work, you and your qualified summer youth employees must complete and file Form 8850 with the appropriate designated local labor agency, called state workforce agencies. This satisfies your obligation to prescreen employees to ensure they live in an empowerment zone.
There are four key dates you must supply on Page 2 of Form 8850:
- The date employees gave information. This must be the same as or earlier than the date you offered jobs to these summer youths
- The date you offered jobs to summer youths
- Their hire date
- Their first day of work.
The dates summer youths were hired and started working must be on or after the dates they gave you information and were offered jobs.
If you don’t receive certification from your SWA before employees’ first day of work, you must file Form 8850 with the SWA within 28 days of them beginning work.
The DOL’s website lists the SWAs.
Step 2: To claim the WOTC, attach Form 5884 and Form 3800 to your Form 1120.
Because the WOTC is part of the general business credit, if you don’t use up all of your general business credit during your current tax year, you can carry it back one year and then forward for 20 years.
No double dipping: If you take the WOTC, you can’t also deduct the wages as a salary expense on your 1120.
The DOL has more information about the WOTC on its website.
