Work Opportunity Tax Credit 101 for restaurants

Staffing is a never-ending challenge for restaurants. In a post pandemic world troubled with worker shortages and supply chain issues, restaurants are struggling more than ever before. Budget constraints limit the usual solutions of better pay and more benefits, leaving restaurants to find more creative ways to protect their bottom line while meeting their staffing needs. Enter the sweet spot – The Work Opportunity Tax Credit.

Targeted WOTC groups

The Work Opportunity Tax Credit (WOTC) is a federal tax credit that acts as an incentive for employers to hire employees from specific target groups, including workers from families who receive government assistance, former felons, qualified veterans, workers who live in targeted areas, people with disabilities, SSI recipients, the long-term unemployed and summer youths.

Individuals who qualify for WOTC

IV-A Recipients are individuals who are members of families receiving assistance from state programs funded under part A of title IV of the Social Security Act relating to Temporary Assistance for Needy Families (TANF). The employee needs to have received assistance for nine months out of the 18 months before hiring.

Qualified veterans are individuals who were on active duty in the U.S. Armed Forces (other than for training) for more than 180 days, ending more than 60 days before the hiring date and are in one of certain categories. The categories are members of families who received assistance under the Supplemental Nutrition Assistance Program (SNAP) for at least three months during the 12 months ending on the hiring date, veterans entitled to compensation for a service-connected disability and have a hiring date within one year after his or her discharge or release from active duty, veterans entitled to compensation for a service-connected disability who were unemployed for at least six months during the 12 months preceding the hiring date, veterans unemployed for at least four weeks (but less than six months) during the 12 months ending with the hiring date, or veterans unemployed for at least six months during the 12 months ending with the hiring date.

Qualified former felons are those you’ve hired within a year after they’ve been convicted of a felony or been released from prison for a felony.

Designated Community Residents (DCR) are workers who are between 18 and 40 who live in an Empowerment Zone (EZ), enterprise community (EC), renewal community (RC), or a Rural Renewal County (RRC). For these individuals wages paid when the employee is not living in one of those areas do not qualify so be sure to keep track of their current address.

Vocational Rehabilitation Referrals are persons who have a physical or mental disability and have been referred to work in your restaurant during or after receiving rehabilitative services based on a state plan under the Rehabilitation Act of 1973, an Employment Network Plan under the Ticket to Work program or a Department of Veteran Affairs program.

Staffing your restaurant for summer hours with Qualified Summer Youth Employees can be a win-win. They need to be at least 16 years old, but under 18 on the hiring date or on May 1, whichever is later. The catch is they can only work between May 1 and September 15 and they must live in an EZ, EC, or RC.

Qualified Supplemental Nutrition Assistance Program (SNAP) Benefits Recipients must be between 18 and 40 and be a member of a family receiving SNAP benefits for the last six months or at least three months in the last five months during the period of time ending on the hire date.

Qualified Supplemental Security Income (SSI) Recipients qualify for the credit when they have received SSI benefits for any month ending within the 60-day period that ends on their hire date.

Long-Term Family Assistance Recipients are those who at the time of hiring are members of a family that received assistance under an IV-A program for a minimum of the prior 18 consecutive months, received assistance under an IV-A program for a minimum 18 months beginning after 8/5/1997 and it has not been more than two years since the end of the earliest 18-month period, or they are no longer eligible for assistance under an IV-A program because federal or state law limits the maximum time limit for those payments, and it has been less than two years since their assistance ended.

Qualified Long-Term Unemployment Recipients are those who have been unemployed for at least 27 consecutive weeks when hired, and who received unemployment compensation during some or all that time.

Ready to get started maximizing the WOTC credit? Your restaurant CPA can help you get your processes in order. Reach out today.

Tax benefits of the WOTC

Once these eligible employees are identified and hired and all appropriate paperwork is filed, your tax credit is generally calculated based on qualified wages paid to the new hire in their first year of employment.

The maximum allowable credit per employee is generally $2,400 for first-year wages, however wages paid to certain qualified veterans may be eligible for a higher credit amount. This credit is a dollar-for-dollar benefit on your tax return which is better than a deduction because the deduction only saves you the amount of deduction multiplied by your tax rate.

What restaurant owners need to know about the WOTC

Your restaurant’s salaries and qualified wages expense claimed on your tax return must be reduced by any amount of credit that you receive. If you paid $100,000 in wages but you received a $10,000 WOTC credit, you would have to reduce that $100,000 down to $90,000. Sorry, like the Health Department, the IRS frowns on double dipping.

The credit does not apply to relatives of the owners, dependents or rehires. You can’t fire a WOTC employee and then rehire them and claim the credit again and the credit only applies for the employee’s first year of employment.

Additionally, all eligible employees must work at least 120 hours with their opportunity tax credit increasing as their hours go up.

Why you need a WOTC experienced CPA

WOTC is complicated and requires a lot of detailed paperwork with strict filing deadlines. You need to be sure to cross your T’s and dot your I’s to qualify for the federal tax credit.

Baker Tilly offers restaurant business services that go beyond income and payroll taxes. Our restaurant CPAs understand your changing business environment and can tackle the unique issues you face in the restaurant industry while also providing valuable information, insights, and tips that speak specifically to your needs as a restaurant owner.

What restaurants often learn too late is all eligible employees need to be prescreened and preidentified. Having an experienced CPA can help you lay the groundwork to get the full amount of credit you’re eligible for.

While the key incentive to hiring WOTC eligible employees is the credit, helping disadvantaged groups get a leg up is like a dish of your favorite comfort food. Contact your Baker Tilly advisor today to get started.

Austin Bradley
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Updates from the Statutory Accounting Principles Working Group’s August 2022 Summer National meeting