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Blake Christian
Blake Christian

Hire a Hero, Enjoy the Benefits

Returning veterans offer enhanced employer tax credits.

December 8, 2011
by Blake Christian, CPA, MBT

The Work Opportunity Tax Credit (WOTC) was set to expire on January 1, 2012, but recent provisions have been enacted to extend some parts of this credit, specifically for employers who hire veterans. Under the three percent Withholding Repeal and Job Creation Act (The 2011 Act) that President Obama signed on November 21, 2011, an employer will be eligible for a credit of up to $9,600 for each qualified veteran that they hire after the law’s enactment date
(November 21, 2011).

Background

Under the pre-2011 Act law, an employer was eligible for a federal tax credit for hiring individuals that qualified under statutorily defined targeted groups. Through December 31, 2011, these targeted groups include:

  • Families receiving payments under the Temporary Assistance for Needy Families program;
  • Qualified veterans, such as those who received food stamps or had military service-connected disabilities;
  • Qualified ex-felons;
  • Designated community residents (generally those living in economically depressed areas);
  • Vocational rehabilitation referrals;
  • Qualified summer youth employees;
  • Qualified food stamp recipients;
  • Qualified Supplemental Security Income (SSI) recipients; and
  • Long-term family assistance recipients.

The 2011 WOTC credit can be claimed on Form 5884 and is based on a percentage, ranging from 25 percent to 40 percent, of qualified first-year wages. For employers that hire individuals who qualify as long-term family assistance recipients, the credit is 50 percent of the employee’s qualified second year wages. The maximum eligible credits are as follows:

  • Up to $4,000 ($10,000 maximum wages x 40 percent) of credits for the first-year and $5,000 ($10,000 maximum wages x 50 percent) of credits for the second year for a long-term family-assistance recipient.
  • Up to $1,200 ($3,000 maximum wages x 40 percent) of credits for hiring summer youth employees.
  • Up to $2,400 ($6,000 maximum wages x 40 percent) of credits for hiring qualified veterans and up to $4,800 ($12,000 maximum wages x 40 percent) of credits for a veteran with service-connected disabilities.
  • Up to $2,400 ($6,000 maximum wages x 40 percent) of credits for any other targeted group.

A “qualified veteran” is a veteran who is certified by a designated local agency as being:

  1. A member of a family receiving assistance under a food-stamp program for at least three months, all or part of which is during the 12-month period ending on the hiring date or
  2. Entitled to compensation for service-connected disability and who, during the first-year period ending on the hire date was either:

    • Discharged or released from active duty in the U.S. Armed Forces not more than one year before the hiring date or
    • Unemployed for a period or periods totaling at least six months during the one-year period ending on the hiring date. An individual is a veteran if he or she served on active duty (other than training) for a period of more than 180 days and did not have had a period of extended active duty (not including training) of more than 90 days that ended during the 60-day period ending on the hiring date.

A successor employer, one that acquires substantially all of the property used in a trade or business of another employer, must reduce the first- or second-year wages paid or incurred by the successor, by the first or second year wages paid or incurred by the previous employer. An employer must complete Form 8850 (PDF) link:

Pre-Screening Notice and Certification for Work Opportunity Tax Credit and submit it to the appropriate state workforce agency no later than 28 days after the date the qualified employee begins employment.

Enhanced Employer Credits for Hiring Veterans (Post-November 20, 2011 Hires)

The WOTC is set to expire for all targeted groups on December 31, 2011, but the 2011 Act extends the credit to employers who hire veterans after November 21, 2011 and before January 1, 2013. The Act enhances the WOTC by creating the Returning Heroes Tax Credit and the Wounded Warriors Tax Credit.

Under the Returning Heroes Tax Credit, an employer may be eligible for the following credits:

  • Up to $2,400 ($6,000 maximum wages x 40%) of credits for hiring a veteran who has been unemployed for at least four weeks.
  • Up to $5,600 ($14,000 maximum wages x 40%) of credits for hiring a veteran who has been unemployed for more than six months.

Under the Wounded Warriors Tax Credit, an employer may be eligible for the following credits:

  • Up to $9,600 ($24,000 maximum wages x 40%) of credits for hiring a veteran with service- connected disability and who has been unemployed for more than six months.
  • Up to $4,800 ($12,000 maximum wages x 40%) of credits for hiring a veteran with a service- connected disability (and do not meet the above Returning Hero requirements)or who qualify as food-stamp recipients (Note: The Act maintains the existing maximum WOTC amount for this group).

New Credits Can Offset Not-For-Profit Entities’ Payroll Tax

The Act also makes the above referenced credits eligible to tax-exempt employers. The credit is subject to limitations and is allowed against the OASDI (Old-Age, Survivors, and Disability Insurance Social Security) tax that the exempt employer would have to pay, but cannot exceed the OASDI tax payable for all employees of the tax-exempt organization during the applicable employment year. In addition, the credit is modified as follows:

  • The credit percentage of qualifying first-year wages is 26 percent (instead of 40%).
  • The credit percentage of qualifying wages is 16.25 percent (instead of 25%) for a qualified veteran who has completed at least 120, but less than 400, hours of service for the employer.
  • The tax-exempt employer can only account for the wages paid to a qualified veteran for services related specifically to the furtherance of the “activities related to the purposes or function constituting the basis of the organization's exemption.”

Finally, the Act enhances and streamlines the procedures for receiving certifications for employees under WOTC, by adding the following language to the existing Sec. 51(d)(13):

  • “A veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of Code Sec. 51(d)(3)(A)(ii)(II) or , if he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than six months during the one-year period ending on the hiring date.
  • “A veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of , if he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than four weeks (but less than six months) during the one-year period ending on the hiring date.”

The Internal Revenue Service (IRS) may also provide alternative methods to employers to receive certification for qualified veterans because of unemployment, at their own discretion.

There are no specific requirements that an employee must be hired into a new or pre-existing position or that the employee maintain employment for a full-year, but note that the minimum hours that the employee must have worked in the employer’s trade or business is at least 120 hours for the first-year of employment in order to claim the WOTC.

Conclusion

Although the other (non-veteran) WOTC targeted groups are expected to disappear after 2011 (unless Congress passes an extension), the WOTC benefits can still be claimed in calendar 2012 for those qualified employees under other target groups who were hired by the end of 2011, as long as they meet the minimum-hour requirements and their qualified first or second year wages extend into the next tax years.

Following are a few of the many websites that focus on veteran job candidates:

The large number of returning veterans will appreciate those employers that utilize this program to increase hiring of those who have served our country. Therefore, employees desiring to employ veterans and access these valuable WOTC benefits can start their search at the above sites.

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Blake Christian, CPA, MBT, is a tax partner in the Long Beach, California-based office of Holthouse Carlin & Van Trigt LLP and is co-founder of National Tax Credit Group, LLC. He can be reached at (562) 216-1800.