COVID-19 Presents Work Opportunity Tax Credit Possibilities for Restaurants
Restaurants Hiring Employees May Qualify for Substantial Tax Benefits
By James Bailey, CPA
In a year that has truly been unlike any other, the restaurant industry has faced considerable challenges. With challenges, however, comes opportunity. In this case, it’s the Work Opportunity Tax Credit (WOTC). This credit can provide restaurant owners with much-needed tax savings in the midst of shutdowns, legislative mandates, and a new way of operating in a socially distanced and take-out fashion.
When the WOTC was introduced in 1977, the credit was designed to encourage employers to hire employees who have traditionally faced barriers to employment. You can read more about that here.
Substantial Benefits: Work Opportunity Tax Credits
During an employee’s first year of employment, employers can recoup 25 percent of gross wages paid to a qualifying employee as long as he or she worked between 120 and 400 hours. For employees who worked more than 400 hours, employers can access a tax break of 40 percent.
Restaurant employers can recoup up to $9,600 per qualified employee. If you were to hire ten employees in one year that were WOTC-qualified, you could see $96,000 in tax savings.
In a normal year, U.S. companies claim over $1 billion in WOTC credits which translates to between $2.5 billion and $4 billion in wages paid to employees.
The WOTC tax break impacts the employer’s tax situation even though it’s the employee who must qualify. WOTC is available to employers only in the first year of a qualified employee’s employment.
What makes an employee ‘qualified’?
For a restaurant owner to take advantage of the WOTC, qualified employees must:
- Have received 27 weeks of uninterrupted government unemployment assistance. Twenty-seven weeks seems like a long time, but unfortunately, many employees are hitting this threshold this year due to high unemployment rates caused by the pandemic.
- Be hired before January 1, 2021
- Work at least 120 hours during the year before you can claim the credit.
Applying for the WOTC
The Work Opportunity Tax Credit is available to all businesses since it’s the employees that must qualify, not the business itself. Plan to stick with your existing hiring practices. By law, you’re barred from asking applicants certain questions that would give you insight into a potential employee’s qualification for the WOTC.
After a worker is hired, you as the employer must engage in a screening process to identify qualification. At this point, a pre-screening notice is filed with the appropriate state workforce agency.
- In Arkansas, it’s the Division of Workforce Services.
- In Kansas, it’s the Secretary of State’s office and must be filed within 28 days of the employee’s start date.
- In Missouri, it’s the Office of Workforce Development (OWD).
- In Nebraska, it’s the Department of Labor.
Firms that specialize in the WOTC can be engaged to handle the qualification and screening process. Hiring a firm as an outside expert is usually well worth the investment (usually around 25% of the credit amount) because they understand the various qualification rules and deadlines and outweigh the cost of accidentally missing a qualified WOTC employee.
The tax benefit of the WOTC is not immediate. Come tax season, you won’t see the benefit on your tax return in the first year of the worker’s employment, but you will the following year.
For those businesses that consistently hire qualified workers that have been through some tough times, this tax benefit can be used continuously and isn’t expected to go anywhere, even when elected officials change.