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Tax Credits and Incentives

Summer Employment May Come With Tax Credits

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

This summer, certain employers may benefit from federal tax credits for employing qualified summer youth employees.

The Work Opportunity Tax Credit (WOTC) is a general business credit provided under Code Sec. 51 that is jointly administered by the 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: (1) is in their first year of employment; (2) is certified as being a member of a targeted group; and (3) performs at least 400 hours of services for that employer. As such, 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.

This year, the Treasury Department issued a proposal that would eliminate the 25% credit because it believes the credit may encourage the hiring of temporary employees, which the Treasury Department says is contrary to the goal of the WOTC for providing long-term employment opportunities for targeted groups. The proposal would be effective for individuals hired after December 31, 2023.

One of the 10 targeted groups for the WOTC is qualified summer youth employees. Such an employee is one who: (1) is at least 16 years old, but under 18 on the hiring date or on May 1, whichever is later; (2) only performs services for the employer between May 1 and September 15 (was not employed prior to May 1), and (3) resides in an Empowerment Zone (EZ).

An employer must pre-screen and obtain certification from the appropriate Designated Local Agency (referred to as a State Workforce Agency or SWA) that an employee is a member of a targeted group to claim the credit. To satisfy the requirement to pre-screen a job applicant, on or before the day that a job offer is made, a pre-screening notice (Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit) must be completed by the job applicant and the employer.

The credit is limited to the amount of the business income tax liability or Social Security tax owed. A taxable business may apply the credit against its business income tax liability. In general, taxable employers may carry the current year’s unused WOTC back one year and then forward up to 20 years.

Some research into this and the other 10 targeted groups may prove beneficial for a business’s bottom line regarding valuable tax credits. See Payroll Guide ¶20,570 for more information.

This article originally appeared in Checkpoint’s Payroll Updates.


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