Seasonal Summer Employees Can Provide Tax Benefits

Article Highlights:

  • What is the Work Opportunity Tax Credit?

  • Maximum Credit

  • Who Can Claim the Credit?

  • Qualified Employees

  • Pre-screening and Certification

  • Tax-exempt Employers

Summer is upon us, which signals the need for seasonal employees to fill in for workers who are on vacation during the busy months ahead and even for some gearing up for the upcoming hectic holiday season. However, given the current labor shortage many businesses are facing a tight jobs market. So, it may be time to become creative.

One solution might be hiring family members. Financially, it makes more sense to keep the family employed rather than hiring strangers, provided, of course, that the family member is suitable for the job.

You might even consider hiring your children to work in your business. Rather than helping to support your children with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked. Click here for information related to hiring your children in your business and the associated tax breaks.

Another solution might be hiring long-term unemployment recipients and other groups of workers facing significant barriers to employment. Doing so may allow you to benefit from the Work Opportunity Tax Credit (WOTC).

The Work Opportunity Tax Credit (WOTC) is a general business tax credit that is jointly administered by the Internal Revenue Service (IRS) and the Department of Labor (DOL). The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025.

The WOTC may be claimed by any employer that hires and pays or incurs wages to certain individuals who are certified by a designated local agency (sometimes referred to as a state workforce agency) as being a member of one of 10 targeted groups.

In general, the WOTC is equal to 40% of up to $6,000 of wages paid to, or incurred on behalf of, an individual who:

  • Is in their first year of employment with the business;

  • Is certified as being a member of a targeted group; and

  • Performs at least 400 hours of services for that employer.

However, an employer cannot claim the WOTC for employees who are rehired.

Maximum Credit - Thus, the maximum tax credit is generally $2,400. A 25% rate applies to wages for individuals who perform fewer than 400 but at least 120 hours of service for the employer. Up to $24,000 in wages may be considered in determining the WOTC for certain qualified veterans.

Who Can Claim the Credit - Employers of all sizes are eligible to claim the WOTC. This includes both taxable and certain tax-exempt employers located in the United States and in certain U.S. territories. Taxable employers claim the WOTC against income taxes, and in general, may carry the current year’s unused WOTC back one year and then forward 20 years. “Carrying back” the credit means that the tax return filed for the prior year will need to be amended to claim the credit on that return. The procedure is different for eligible tax-exempt employers; please contact this office for details.

Qualified Employees - An employer may claim the WOTC for an individual who is certified as a member of any of the following targeted groups:

  • Qualified IV-A Recipient (relates to Temporary Assistance for Needy Families (TANF))

  • Qualified Veteran

  • Qualified Ex-Felon

  • Qualified Designated Community Resident (DCR)

  • Qualified Vocational Rehabilitation Referral

  • Qualified Summer Youth Employee

  • Qualified Supplemental Nutrition Assistance Program (SNAP) Recipient

  • Qualified Supplemental Security Income (SSI) Recipient

  • Qualified Long-Term Family Assistance Recipient

  • Qualified Long-Term Unemployment Recipient 

Pre-screening and Certification - An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work. Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850. The instructions to Form 8850 provide details about the targeted groups.

Please contact this office for additional information and assistance to determine if hiring family members or hiring individuals who qualify for the WOTC is appropriate for your business.

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