The following article was written by our partners at Henry + Horne.
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.
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 include:
- The formerly incarcerated or those previously convicted of a felony
- Residents in areas designated as empowerment zones or rural counties
- Individuals experiencing long-term unemployment
- Summer youth employees residing in an empowerment zone
The employee needs to work at least 120 hours in the first year of employment for any credit to be calculated.
- If the employee works from 120 to 400 hours, the credit is calculated at 25% of wages, which are capped at between $3,000 and $24,000 depending on the target group
- If the employee works over 400 hours, the credit is calculated at 40% of wages, with the same applicable caps
Once these eligible employees are identified and hired and all appropriate paperwork is filed, your tax credit is calculated based on the number of hours worked by the new hire in their first year of employment.
The maximum allowable credit per employee is based on the target group that they come from, ranging from $1,200 to $9,000 depending on the group and the number of hours they work. 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.
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.
Brian Campbell, CPA