The construction industry has been facing a labor shortage for years. Although there are various ways to tackle the challenge, one approach to keep in mind is expanding your hiring pool to, in part, avail yourself of a potentially valuable tax break: the Work Opportunity Tax Credit (WOTC).
The WOTC is available to employers as an incentive for hiring individuals who receive government assistance and reintroducing them into the workforce. Depending on the targeted group to which a worker belongs, as well as the wages earned, the maximum credit can range from $2,400 to $9,600 per new hire. So, it is well worth determining whether the tax credit could help your construction company.
Catching Up With the Credit
The WOTC may be claimed by any employer that hires and pays (or incurs) wages to certified individuals from eligible groups that consistently face significant employment barriers. Certification is generally performed by a designated state workforce development agency (typically, a state’s Department of Labor). There are 10 targeted groups:
1. Individuals experiencing long-term unemployment
2. Adult residents in areas designated as empowerment zones or rural renewal counties with high levels of poverty and unemployment
3. Summer youth employees living in empowerment zones or rural renewal counties
4. Individuals who have been referred to an employer following completion of a rehabilitation plan or program
5. Those who receive state assistance under part A of title IV of the Social Security Act (IV-A recipients)
6. Individuals whose families are IV-A recipients
7. Recipients of the Supplemental Nutrition Assistance Program (SNAP)
8. Individuals whose families are SNAP recipients
9. U.S. military veterans whose families are SNAP recipients, are unemployment benefit recipients, or have service-related disabilities and are unemployment recipients
10. The formerly incarcerated or those previously convicted of a felony
One word of warning: You cannot claim the tax credit for rehired employees.
Generally, the WOTC is equal to 40% of up to $6,000 of wages paid to employees in their first year of employment who put in at least 400 hours of work during that year. For the wages of certain qualified veterans, the $6,000 cap is boosted to $24,000. A 25% rate applies to wages for employees who perform less than 400 but at least 120 hours of service.
The amount of the credit is limited to your construction company’s income tax liability or your share of Social Security taxes. Any unused amount is subject to the carryback and carryforward rules applicable to tax credits.
Applying for Certification
As mentioned, to claim the WOTC, you must first apply for certification verifying that a new hire is a member of a targeted group. This is done by completing Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” before offering employment.
Both your construction company and the job applicant must fill out the form, which you then need to submit, within 28 calendar days of the new hire’s start date, to the designated local agency in the state where the employee will work. The agency might require additional forms to approve certification.
If the new employee meets eligibility requirements for a targeted group, you will receive certification from your state workforce agency. After certification is secured, you can claim the WOTC as a general business credit against your federal income taxes.
Some applicants might have already acquired precertification from a state workforce agency or another participating agency before beginning their job searches. However, precertification is not required for you to eventually claim the tax credit.
Finding Job Candidates
To find the talent you need, your best bet is to contact your state workforce agency or U.S. Department of Labor American Job Centers and their partnering agencies, which include the following:
- Vocational rehabilitation agencies
- City and county social service offices
- The Veterans’ Employment and Training Service
These entities help employers connect with skilled job seekers who are likely members of WOTC targeted groups. American Job Centers also can assist with recruiting, hosting job fairs, conducting skills assessments, and providing support to workers transitioning to new jobs.
Keep It In Mind
The WOTC has been extended until December 31, 2025. That makes it an important tax break to keep in mind this year and over the next several when hiring for your construction business. We can provide further details on the credit and help you claim it in the event you do hire one or more eligible employees from a targeted group.
Disclaimer of Liability
Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.