Overview
Amount of the Credit
Targeted GroupsHigh-risk youths
Qualified summer youths
Qualified IV-A recipients
Qualified food stamp recipients
Qualified veterans
Vocational rehabilitation referrals
Qualified ex-felonsMinimum Employment Period; Other Ineligible Individuals
Certification
Qualified Wage Exclusions
Employer's Wage Deduction Reduced
Effective Date
OverviewIn hiring workers after September 30, 1996, employers will have a Federal tax incentive to employ individuals who are deemed to be disadvantaged for employment purposes under certain governmental guidelines. The Small Business Job Protection Act of 1996, signed into law on August 20th by President Clinton, provides a new Work Opportunity Tax Credit (WOTC).
The WOTC replaces the Targeted Jobs Tax Credit (TJTC), which expired with respect to workers hired after December 31, 1994. The WOTC rules relating to eligible workers, credit rate, minimum employment period, and certification differ from the rules under the expired TJTC.
Amount of the CreditEmployers electing the WOTC may claim a credit of 35% of qualified first-year wages paid to an employee from one of the designated targeted groups (listed below). Generally, an employer may take into account the first $6,000 of a target-group employee's first-year wages, for a maximum credit of $2,100. For a qualified summer youth employee, an employer may take into account the first $3,000 of wages for up to 90 days between May 1 and September 15, for a maximum credit of $1,050. The first-year wage period generally starts on the first day the individual begins work for the employer.
Targeted GroupsThe WOTC is intended to encourage employers to hire workers from seven groups whose members otherwise may have difficulty finding employment. In order to qualify for the credit, certain certification and minimum work period requirements (discussed below) must be met. The seven targeted groups include:
1. High-risk youths
The high-risk youth group consists of individuals who are at least 18 but less than 25 years of age as of the date hired and who reside in either a Federal "empowerment zone" or a Federal "enterprise community."
The nine current Federal empowerment zones are designated areas within Atlanta, Baltimore, Chicago, Detroit, New York City, Philadelphia and Camden, the Kentucky Highlands (Clinton, Jackson, and Wayne Counties, KY), the Mississippi Mid-Delta region, and the Rio Grande Valley (Starr, Cameron, Hidalgo, and Willacy Counties, TX). There currently are 95 designated Federal enterprise communities.
2. Qualified summer youths
The qualified summer youth category also is limited to young workers living in empowerment zones and enterprise communities. An employer may claim the WOTC with respect to 16-and 17-year-old youths who (1) reside in empowerment zones or enterprise communities and (2) work for the employer between May 1 and September 15. (The age limitation is measured as of the date of hire or May 1, whichever is later.) The youth may not have worked for the employer during the 90-day period prior to the date of hire. The minimum work period requirement and the maximum credit-eligible wage amount are reduced for qualified summer youths due to the limited employment period.
3. Qualified IV-A recipients
This category consists of members of families who have received assistance under part A of title IV of the Social Security Act, Aid to Families with Dependent Children (AFDC), for at least a nine-month period ending during the nine-months preceding the date of hire.
4. Qualified food stamp recipients
This group consists of individuals who are at least 18 but less than 25 years old (on the date of hire) and:
whose family has received food stamp assistance for the six months preceding the date of hire, or
in the case of an individual whose family no longer qualifies for food stamps because of section 6(o) of the Food Stamp Act of 1977, whose family has received food stamps for at least three of the last five months preceding the date of hire.
5. Qualified veterans
Qualified veterans are veterans who are a member of a family that has received:
AFDC assistance for at least a nine-month period ending during the 12 months preceding the date of hire, or
food stamp assistance for at least a three- month period ending during the 12 months preceding the date of hire.
For WOTC purposes, veterans are defined as individuals who (1) either served on active duty in the Armed Forces, other than in training, for more than 180 days or were discharged or released from active duty for a service-connected disability and (2) did not serve on extended active duty during the 60- day period preceding the date of hire.
6. Vocational rehabilitation referrals
An employer may claim the WOTC with respect to an individual who has a physical or mental disability that constitutes or results in a substantial handicap to employment if the individual is referred to the employer by a designated local agency while receiving or upon the completion of certain vocational rehabilitation training.
7. Qualified ex-felons
Targeted workers within this group are individuals who (1) have been convicted of a felony under Federal or State law and (2) are hired by the employer claiming the WOTC not more than one year after the individual's last conviction or prison release date. Maximum family income limitations apply.
Minimum Employment Period;
Other Ineligible IndividualsMinimum employment period requirements also apply. Qualified workers must work for the employer for at least either:
180 days (20 days in the case of a qualified summer youth employee), or
400 hours (120 hours in the case of a qualified summer youth employee).
If a worker is employed less than the minimum required time, then the employer cannot claim any credit as to that employee.
Also, no credit is available for wages paid to individuals related directly or indirectly to the employer or to certain individuals previously employed by the taxpayer.
CertificationAn individual may qualify as a member of one or more of the targeted groups discussed above only if that individual is certified by a State employment security agency as meeting the specified requirements for that group. The Small Business Job Protection Act provides an employer with two certification procedures that may be followed. The employer may receive a written certification on or before the day on which the individual begins work. Alternatively, the employer may complete a specified pre-screening notice on or before the day the individual is offered employment and then submit such notice for certification no later than 21 days after the individual begins working.
The pre-screening notice must contain information that the employee provides to the employer that forms the basis of the employer's belief that the individual is a member of a targeted group. The employer and the individual must sign the notice under penalties of periury.
Qualified Wage ExclusionsFor purposes of the WOTC, lhe term "wages" generally has the same meaning as for purposes of the Federal Unemployment Tax Act. However, credit-eligible wages do not include:
wages paid to an individual if the employer receives federally funded payments for on-thejob training of the individual;
work supplementation payments paid to the employer in connection with the worker under section 482(e) of the Social Security Act; and certain payments for services during labor disputes.
Special rules apply for defining wages in the case of certain agricultural labor and railway labor.
Employer's Wage Deduction ReducedAn employer's Federal tax deduction for wages and salaries paid or incurred must be reduced by the amount of the WOTC.
Effective DateThe WOTC is available for wages paid or incurred to a qualified individual who begins work for an employer after September 30, 1996, and before October 1, 1997.
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