Work Opportunity Tax Credit Serves Up Potential Savings for Restaurant Owners
Tax Benefit for Hiring Workers Who Face Challenges
By James Bailey
One of the many ways the government tries to help certain workers find jobs is through the Work Opportunity Tax Credit (WOTC). For the restaurant industry, which employs large numbers of minimum wage workers, the WOTC can yield significant tax savings for restaurant owners.
The WOTC traces its roots to 1977, when the federal government first enacted a tax credit to encourage employers to hire workers who have traditionally faced barriers to employment, including:
- Veterans who are disabled, who have received temporary government assistance or SNAP benefits, or who have been unemployed for extended periods of time within the previous year,
- Recipients of temporary assistance such as SNAP benefits,
- Supplemental Security Income recipients,
- Workers who were released from incarceration within the past year,
- Workers who live in certain economically depressed regions,
- Workers under age 18 seeking summer employment in certain economically depressed regions, or
- Individuals who have been unemployed for at least six months and have received unemployment compensation during all or part of that time.
The goal of the WOTC is to put America to work, and it has made an impact. American companies claim more than $1 billion in WOTC credits annually, representing between $2.5 billion and $4 billion in wages paid to workers.
“Even just a handful of WOTC-eligible new employees in a year can produce a significant reduction in a company’s federal income tax liability,” said Steven C. Bailey, treasurer and controller of Atlantic Development Corporation, a Pizza Hut franchisee. “The WOTC screening process should be part of the hiring/onboarding process, to be sure that no eligible new hire is overlooked.”
The WOTC benefits can be significant. As an employer, you can recoup 25 percent of the amount of wages paid to a qualified employee who worked between 120 and 400 hours during the first year of employment. The tax break rises to 40 percent for employees who worked more than 400 hours in the first year.
In the restaurant industry, employers can recoup up to $9,600 per qualified employee. If you hired five workers in one year who qualified for the WOTC, you could see $48,000 in tax credits.
Employers can take the WOTC only for the first year of a qualified worker’s employment, and it is important to understand that the WOTC is a tax break that accrues only to the employer, not the employee, even though it is the employee who must qualify.
How to Apply for WOTC
Any business may apply for the WOTC because the business does not need to qualify. It’s the employees who must be qualified, and that requires the employer to engage a screening process after a worker is hired. In other words, you can maintain your existing hiring practices. You don’t have to target certain categories of people for recruiting. In fact, employers are barred by law from asking job applicants certain questions that would identify them as qualifying for the WOTC.
After a new hire is brought on board you obtain certification that the worker is qualified under WOTC rules and file a pre-screening notice with the appropriate workforce agency in your state. In Kansas, this is done with the secretary of state’s office. This pre-screening notice must be filed within 28 days after the new employee begins work.
Third-party firms that specialize in the WOTC can be hired to handle the screening and qualification process. These firms understand the various qualification rules and deadlines, and their fees (usually about 25% of the credit amount) are well worth it when considering the cost of missing an employee who would otherwise qualify for the WOTC.
Your qualified employee must complete at least a full year of employment before you can claim the WOTC, so it’s important to understand that you won’t see that benefit on your tax return for the tax year in which the worker is hired. You’re going to have to wait another year. But the WOTC isn’t expected to go anywhere. If you hire qualified workers over multiple years, you can count on this tax benefit as a reward for providing employment to workers who have had some tough times.
If you have questions about how the Work Opportunity Tax Credit may work for your restaurant, please contact us.
James Bailey, CPA, Senior Manager, leads Adams, Brown, Beran & Ball, Chtd.’s Restaurant Industry niche. With over fifteen years of public accounting and restaurant consulting experience, he strategizes with Adams Brown’s Restaurant clients on the unique challenges they face. Additionally, James is a keen researcher of cutting-edge technologies in the industry. For more information, contact James Bailey.