Small business owners shouldn't overlook the Welfare-to-Work (WTW) tax credit, according to the California Society of CPAs (www.calcpa.org). The WTW program provides employers with incentives to hire and retain long-term welfare recipients by offering valuable income tax credits of as much as $8,500 per new hire. The program is available to businesses in a variety of industries and particularly to companies that hire entry-level people.
Established by the Taxpayer Relief Act of 1997 and extended earlier this year by President Bush, the tax credit applies to new hires who begin work after Dec. 31, 1997, and before Jan. 1, 2004. The business need not be located in an empowerment zone or enterprise or renewal community to be eligible.
ESTABLISHING ELIGIBILITY
To qualify for the WTW tax credit, the employer must hire a long-term welfare recipient. Long-term welfare recipients are defined as
- members of a family who received aid from Temporary Assistance for Needy Families (TANF) or from Families with Dependent Children (AFDC) for at least 18 consecutive months before the date of hire;
- members of a family who received TANF or AFDC for at least 18 months and are hired within two years after the end of the most recent 18-month period;
- members of a family who are no longer eligible for assistance after Aug. 5, 1997, and are hired within two years after their eligibility expired.
To qualify for the first- and second-year tax credits, the company must employ the individual for a minimum of 400 hours or 180 days each year. If the employee does not work out, there is no risk to the employer. The company can separate the individual from employment, just as it would any other employee.
APPLYING FOR THE TAX CREDIT
Employers must pre-screen applicants for tax credit eligibility before the job offer. This can be as simple as incorporating IRS Form 8850, Pre-screening Notice and Certification Request for the WOTC and Welfare-to-Work Tax Credit, into your standard application process. Form 8850 can be downloaded from www.irs.gov/pub/irs-pdf/f8850.pdf.
The form requires the job applicant's name, address and answers to four simple questions. If the applicant responds "yes" to any of the four questions, the employer should complete the reverse side of the form and mail it within 21 days to the State Employment Security Agency (SESA). The SESA is responsible for verifying that the new hire has met eligibility requirements.
If the job applicant has been referred by a participating agency (or by a SESA), the employer also must complete and send within 21 days of the new hire's start date, the one-page Department of Labor ETA Form 9061, Individual Characteristics Form. This form is available at http://workforcesecurity.doleta.gov/employ/pdf/eta9061.pdf.
CALCULATING THE TAX CREDIT
The Welfare to Work Tax Credit is 35 percent of the first $10,000 in wages earned by the new hire during the first year of employment for a maximum tax credit of $3,500. It also provides a credit of 50 percent of the first $10,000 in wages earned during the second year for a maximum tax credit of $5,000. Thus, the maximum tax credit is $8,500 over a two-year period. The Welfare to Work and the Work Opportunities Tax Credit (WOTC) cannot be claimed for the same individual in the same tax year. (The WOTC pertains to a similar program that encourages employers to hire from eight targeted groups. For more information on the WOTC, visit http://ows.doleta.gov/employ/wotcdata.asp.
PUBLIC-PRIVATE EFFORT PROVIDES WIN-WIN BENEFITS
By actively recruiting welfare recipients not only can you earn valuable tax credits but you help move long-term assistance recipients into private sector jobs and economic self-sufficiency. If you have questions concerning the WTW tax credit, consult with a CPA who can show you how your business can save valuable tax dollars.
