October 12, 2021

Work Opportunity Tax Credit Could Solve Two Problems

For contractors, the struggle to find skilled workers — and in some cases any workers at all — is real. It’s a long-standing industry problem that’s been exacerbated by the pandemic because many of those who lost jobs in 2020 haven’t returned to work or have moved on to other vocations.

One way construction companies can widen their hiring pools while potentially qualifying for a valuable tax break is to complete the eligibility requirements for the Work Opportunity Tax Credit (WOTC).

Amounts and basic rules

The WOTC is designed to incentivize employers to hire employees from “targeted” groups made up of typically disadvantaged individuals. The tax break can be worth as much as $2,400 for each eligible employee hired and even more in other cases. For example, the WOTC can be worth $4,800, $5,600 or $9,600 for certain veterans, and $9,000 for long-term family assistance recipients. (We’ll explain how below.)

The credit is generally limited to eligible employees who begin work for the employer before January 1, 2026. An employer is typically eligible for the credit only for qualified wages paid to members of one or more of 10 targeted groups: 1) qualified members of families receiving assistance under the Temporary Assistance for Needy Families program, 2) qualified veterans, 3) qualified ex-felons, 4) designated community residents, 5) vocational rehabilitation referrals, 6) qualified summer youth employees, 7) qualified members of families in the Supplemental Nutrition Assistance Program, 8) qualified Supplemental Security Income recipients, 9) long-term family assistance recipients, and 10) qualified long-term unemployed individuals.

There’s also a minimum requirement that each employee must have completed at least 120 hours of service for the employer. The credit is unavailable for certain employees who are related to the employer or work more than 50% of the time outside of the employer’s trade or business. (One example of this is someone working as a maid in the employer’s home). Additionally, the credit is generally unavailable for employees who have previously worked for the employer.

How to calculate

For employees other than summer youth workers, the credit amount is calculated under a basic set of rules. The employer can account for up to $6,000 of first-year wages per employee ($10,000 for “long-term family assistance recipients”; $12,000, $14,000 or $24,000 for certain veterans). “First year” refers to the year-long period beginning with the employee’s first day of work; “second year” is the year that immediately follows.

If the employee completed at least 120 hours but less than 400 hours of service for the employer, the wages accounted for are multiplied by 25%. If the employee completed 400 or more hours, all accounted-for wages are multiplied by 40%.

Thus, the maximum credit available for first-year wages is, as previously noted, $2,400 ($6,000 × 40%) for most employees. However, a $4,000 credit ($10,000 × 40%) can be calculated for some long-term family assistance recipients. And an employer may be able to calculate credit amounts of $4,800, $5,600 or $9,600 ($12,000, $14,000 or $24,000 × 40%) for certain veterans.

In addition, for long-term family assistance recipients, a 50% credit may be available for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000 ($10,000 × 40% plus $10,000 × 50%).

For summer youth employees, the rules in the preceding paragraph apply, except that the employer can account for only up to $3,000 of wages. These wages must be paid for services performed during any 90-day period between May 1 and September 15. So, for summer youth workers, the maximum credit available is $1,200 ($3,000 × 40%) per employee.

Certain limits apply

Three primary limits apply to claiming the WOTC:

  • No deduction is allowed for the portion of wages equal to the amount of the credit determined for the tax year,
  • Other employment-related credits are generally reduced with respect to an employee for whom a WOTC credit is allowed, and
  • The credit is subject to the overall limitations on the amount of business credits that can be taken in any tax year. (However, a one-year carryback and 20-year carryforward of unused business credits is allowed.)

Because of these three limits, there may be circumstances under which an employer might elect not to have the WOTC apply. Also, there are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of the credit.

Explore the option

Construction companies need employees — preferably skilled, though you may be able to train or “upskill” a worker with the right programs in place. Contractors also need tax breaks to reduce their tax bills and keep the cash flowing. The WOTC represents an opportunity (no pun intended) to solve both problems. Contact your CPA for more information.

Other ways to mitigate the skilled labor shortage

The Work Opportunity Tax Credit offers construction companies a tax-saving incentive to expand their search for labor to often underserved groups. There are, of course, other ways to address this ongoing challenge.

The adage “money talks” still applies to some extent. Look into whether your compensation rates and benefits are as competitive as possible. Use benchmarking data to compare your offerings to those of similar businesses.

You may also be able to mitigate the skilled labor shortage through shrewd project management. See whether you can adjust job scheduling to distribute skilled labor more easily and evenly. Consider alternate project delivery methods as well. For example, integrated project delivery actively seeks to maximize efficiency — including labor usage.

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