The cost of labor is, and likely will always be, a constant struggle and balancing act for restaurant owners, with rising minimum wage, stricter labor laws, and a competitive labor market. With tight margins, any cost savings can have a significant impact on the bottom-line. One cost savings opportunity available to employers is the Work Opportunity Tax Credit (WOTC) which provides a federal tax credit to employers for hiring certain individuals falling into target groups. WOTC was created, along with other programs, to promote workplace diversity and help target groups who have historically faced significant barriers to employment to enter the workforce.
Reviewing your hiring practices to take advantage of this credit not only provides tax savings but also can have a positive social impact on the communities you serve and the lives of the employees you hire. The individuals who fall into the target WOTC groups typically encounter greater obstacles in gaining employment due to their current or past situations and life challenges. WOTC aims to overcome this by providing financial incentive to employers.
Individuals who fall into one of the following target groups will qualify the employer for WOTC:
- Qualified IV-A Recipient (temporary assistance program)
- Qualified Veteran
- Designated Community Resident (resident of qualified zone)
- Vocational Rehabilitation Referral (physical or mental disability)
- Summer Youth Employee (16-18 years of age and resident of qualified zone)
- Supplemental Nutrition Assistance Program (SNAP) Recipient
- Supplemental Security Income (SSI) Recipient
- Long-Term Family Assistance Recipient
- Qualified Long-Term Unemployment Recipient
At the time the job offer is made, the employer and applicant should complete IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, and DOL Form 9061, Individual Characteristics Form, to determine eligibility and qualify for the credit. These forms should then be submitted to your relevant state workforce agency within 28 days of the employee starting work. The state workforce agency will issue a certification of approval, or will provide an explanation for denial, if not approved.
The credit is based on the qualifying employee’s wages, including tips, in the first year of employment (and second year in certain cases), up to a maximum wage by target group. If the employee worked between 120 – 400 hours, the credit is equal to 25% of eligible wages, and if the employee worked over 400 hours, the credit is equal to 40% of eligible wages. Based on the target group classification and wage limits, the credit can provide up to a maximum tax savings per employee between $2,400 and $9,600.
The credit is limited to your business income tax liability and is claimed against your income tax liability on Form 5884 or Form 3800. Under current legislation, the WOTC program is effective for employees who begin employment before January 1, 2020. We will keep you updated on future changes and extensions of the program beyond 2019.
For questions or more information on WOTC and managing your restaurant’s bottom line, contact Shelley Oswald, Senior Manager within the Hospitality and Consumer Product group at Peterson Sullivan.