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By Mark E. Battersby / Published December 2017
Uncle Sam, the IRS, and the Department of Labor all want to help contractors and other pressure cleaning businesses cut their labor costs. The Workforce Innovation and Opportunity Act (WIOA) of 2014 was created to help develop skilled workers, while the tax laws contain the often misunderstood and little-used Work Opportunity Tax Credit.
The Work Opportunity Tax Credit, or WOTC, is a long-standing income tax benefit that encourages employers to hire workers from within designated groups. And, the WOTC isn’t chicken feed. The credit is generally equal to 40 percent of the newly-hired worker’s first year wages of up to $6,000, for a maximum credit of $2,400 per worker. For disabled veterans, the credit may be available for the first $24,000 of wages, or up to $9,600 per worker. Best of all, the tax credit, unlike a deduction, offsets the employer’s final tax bill.
Although the WOTC is a federal tax credit, it is administered at the state level. The tax credit claimed by employers depends on the target group of the individual hired, the wages paid to that individual in the first year of employment, and the number of hours worked by that individual. Plus, there is also a maximum tax credit that can be earned.
Because lawmakers incentivized hiring, employers can claim the tax credit for a qualifying employee in their first year of hire. After all, staying on the job for more than a year is great, but the WOTC was designed to give people a chance at a job.
As mentioned, the tax credit, depending on the category of the person hired, allows a pressure washing business to claim between $2,400 and $9,600 per person. Businesses that do a lot of hiring—especially those hiring hourly workers—would benefit by attempting to determine whether job candidates fall within one of the targeted groups.
The groups targeted by Congress include those on government assistance programs, veterans, the disabled, felons, and the long-term unemployed. Specifically, the 10 categories are:
For the TANF target group only, the credit is available to employers who hire members of this group for up to a two-year period. In the first year, the pressure cleaning business claims a tax credit equal to 40 percent of the first-year wages, up to the maximum tax credit, if the individual works at least 400 hours. In the second year, an employer may claim a tax credit equal to 50 percent of the second-year wages, up to the maximum, if the individual works at least 400 hours.
For all other targeted groups, the credit is available to employers who hire members of the targeted groups based on the hours worked and the wages earned by the worker in the first year. If, for example, the individual works at least 120 hours, the employer may claim a tax credit equal to 25 percent of those first-year wages up to the maximum tax credit. If the individual works at least 400 hours, a tax credit equal to 40 percent (up to the maximum) may be claimed.
Once an employer finds WOTC-eligible workers, as with all things tax-related, proper forms and timely filing is critical. In fact, all paperwork should be done in advance of the hire in order to fully reap the benefits.
The key document is IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to prescreen employees. The DOL’s Employment and Training Administration (or ETA) is also involved. The completed and signed IRS and ETA forms are submitted to the proper state workforce agency (not the IRS or a federal agency) within 28 calendar days of the employee’s start date.
The state workforce agency may accept applications via mail, fax, or email or may have an automated WOTC process for accepting electronic submissions. Or, utilizing a professional employer organization might be feasible.
A professional employer organization (or PEO) is a firm that provides a service under which an employer can outsource employee management tasks, such as employee benefits, payroll and worker compensation, recruiting, or risk/safety management as well as training and development. Until recently, claiming the WOTC as a client of a PEO remained a complex exercise. Who the tax credits technically belong to varied from state to state and case by case.
Fortunately, this changed thanks to an IRS program that allowed a PEO to become a “Certified” Professional Employer Organization, or CPEO, allowed to offer value-added benefits to their clients while clearing up the question of who owned tax credits. Today, any pressure washing business that does not want to administer WOTC in-house can work with a PEO and/or a tax credit consultant, while the CPEO program may allow the employer to claim the credit or assign it to the CPEO.
Going the extra mile to attract workers can be expensive. Fortunately, several incentives, in addition to the WOTC, exist to ease the financial burden. They include the following:
Best of all, a business may use the Disabled Tax Credit and the architectural/transportation tax deductions together in the same tax year if the expenses meet the requirements of both provisions. To use both, the deduction is equal to the difference between the total expenditures and the amount of the credit claimed.
As mentioned, the Workforce Innovation and Opportunity Act, or WIOA, offers improved services to employers along with incentives to prepare entry-level workers, train workers transitioning to positions requiring different skill sets, and provide additional training for current workers. Thanks to the WIOA, employers have greater flexibility when trying to cope with today’s economy—everything from preparing entry-level workers, to retraining workers, to “up-skilling” current workers. In other words, the WIOA contributes to economic growth and business expansion by ensuring the workforce system is job-driven, all of which supports developing skilled workers and matching them to employers. And, don’t forget about these other resources:
There is no limit on the number of qualified individuals that a pressure cleaning business can hire, making the WOTC a significant option for any business willing to add a screening phase to their hiring process. Still, many businesses balk because of concern about being accused of discrimination, the time consumed and administrative burden, or uncertainty about whether the tax credit will be renewed by lawmakers.
A more immediate downside of the WOTC is that it is only a temporary tax break. The WOTC was extended through 2019, giving employers a few more years of tax incentives to hire eligible workers, including veterans. Will your pressure cleaning business join other employers who cut their business expenses and currently claim more than $1 billion in tax credits each year under the WOTC program?