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IRS Offers Guidance on Tax Credit for Hiring Veterans

(Update February 27, 2012) The IRS has issued additional guidance for the Work Opportunity Tax Credit (WOTC), which was enhanced last year for employers who hire qualified veterans. The new guidelines extend the former 28-day deadline for submitting new veteran hires’ certification, and provide details on how tax-exempt organizations can apply for the credit.

Tax Credit for Hiring Veterans Extended and Enhanced

As a hiring employer, you can claim a significant tax credit if you add U.S. veterans to your payroll before January 1, 2013. The recently enacted Three Percent Withholding Repeal and Job Creation Act includes a one-year extension of the Work Opportunity Tax Credit (WOTC) for employers who hire qualified veterans (previously set to expire January 1, 2012). The act also expands the definition of “qualified veteran,” increases the maximum amount of allowable WOTC, and extends the availability of the credit to tax-exempt employers.

How the WOTC is applied and who qualifies

The WOTC for qualified veterans is figured as a credit against income tax based on a percentage of first-year wages. Generally, the first $6,000 of wages per eligible employee generates a 40 percent credit for a maximum of $2,400 per employee. (Claiming the WOTC, however, reduces your wage deduction on a dollar-for-dollar basis.)

To be eligible for the WOTC, your new employee must be certified as a qualified veteran by a state employment security agency (SESA). As the employer, you must obtain the certification by the day the employee begins work. Alternatively, you may complete a prescreening notice (Form 8850) on or before the day the individual is offered employment and submit it to the SESA within 28 days of your new employee’s start date. If you use this alternative, you must receive certification prior to claiming the WOTC credit.

For purposes of the WOTC, “veteran” means any individual who is certified by a SESA as having served on active duty (other than training) in the U.S. Armed Forces for more than 180 days, or having been discharged or released from active duty for a service-connected disability, and not having been on extended active duty within 60 days of the hire date.

Enhanced provisions for qualified veterans

Along with the one-year WOTC extension, the new legislation expands the definition of “qualified veteran.” To claim the credit on any veterans you hire after November 21, 2011, they must be certified by a SESA as one of the following
  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 months ending on the hiring date
  2. Entitled to compensation for a service-connected disability and:
    1. has a hire date that is not more than a year after having been discharged or released from active duty; or
    2. has aggregate periods of unemployment of six months or more during the one-year period ending on the hire date
  3. Has an aggregate period of unemployment of at least four weeks, but less than six months, during the one-year period ending on the hire date
  4. Has an aggregate period of unemployment of at least six months during the one-year period ending on the hiring date.
Daniel Greenhagen, a tax manager with LarsonAllen, observes that there is no requirement that the employee be a recent veteran (other than for one of the disabled categories). “A Vietnam era vet who was lately unemployed would qualify for the WOTC,” he says. “This suggests that employers will need to scrutinize closely for past military service in any era.”

Veterans hired on or before November 21, 2011, previously had to satisfy either requirement 1 or 2 to qualify for the WOTC. For the new unemployment qualifications (3 and 4, as well as 2b), the act streamlines the certification process: the veteran will be certified as unemployed for the required periods so long as he or she received unemployment compensation under state or federal law meeting the stated time requirements.

New maximum allowable WOTC for qualified veterans

The legislation also changes the eligible wages, and therefore the allowable credit, for the WOTC based on the veterans’ certified category of qualification. The table below summarizes the maximum WOTC amount per employee:

Maximum WOTC for Hiring Veterans

Qualified Veteran Category

Hired on or before November 21, 2011

Hired after November 21, 2011, but before January 1, 2013

1 – Food stamp program

$2,400

$2,400

2a – Disabled and hired within 1 year active duty

$4,800

$4,800

2b – Disabled and unemployed ≥ 6 months

$4,800

$9,600

3 – Unemployed ≥ 4 weeks but < 6 months

$0

$2,400

4 – Unemployed ≥ 6 months

$0

$5,600

The WOTC is reduced for individuals performing less than 400 hours of service during their first year of employment. If your employee works at least 120 hours but less than 400 hours, the credit percentage is reduced from 40 percent to 25 percent. If less than 120 hours of work is performed, the credit is zero.

Tax-exempt employers may now claim WOTC

The new legislation also expands WOTC eligibility to tax-exempt employers who hire qualified veterans after November 21, 2011. For such employers, the credit is allowed against and limited to the amount of the 6.2 percent OASDI (Social Security) tax the employer pays for all employees during the “applicable period,” defined as the 12 months starting from the qualified veteran’s hire date. As the tax-exempt employer, your aggregate WOTC for all qualified veterans is capped at your total OASDI tax for all employees during the applicable period. 

For tax-exempt employers, the credit is 26 percent (rather than 40 percent) of qualifying wages.  Only wages paid for services furthering the tax-exempt employer’s exempt function or purpose qualify for the credit. The maximum amount of WOTC, per employee, is summarized below:

Tax-Exempt Employer Maximum WOTC for Hiring Qualified Veterans

Qualified Veteran Category

Hired after November 21, 2011 but before January 1,2013

1 – Food stamp program

$1,560

2a – Disabled and hired within 1 year active duty

$3,120

2b – Disabled and unemployed ≥ 6 months

$6,240

3 – Unemployed ≥ 4 weeks but < 6 months

$1,560

4 – Unemployed ≥ 6 months

$3,640

The tax-exempt employer credit percentage for reduced hours (see above) is 16.25 percent (rather than 25 percent).

How we can help

The extension and enhancement of the WOTC for qualified veterans provides time and additional incentive for employers, including tax-exempt organizations, to add qualified veterans to their payrolls. The act also significantly reduces the hurdle for qualifying for the WOTC as many veterans, especially those recently returning from active duty, will satisfy the four-week unemployment requirement. LarsonAllen can help you interpret these provisions and apply them on your tax returns.

 


 

Daniel Greenhagen, Manager, Tax
dgreenhagen@larsonallen.com or 612-376-4837 View our tax principals 

Published: 12/16/2011

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