Leveraging Federal Tax Credits for Summer Youth Employment

by | Jul 7, 2023

As summer approaches, many businesses are looking to hire youth workers to fill seasonal roles. What many employers may not realize is that these hires could potentially come with substantial tax benefits. Under the Work Opportunity Tax Credit (WOTC) program, employers may be eligible for a federal tax credit when they employ qualified youth during the summer months.

Administered jointly by the Internal Revenue Service (IRS) and the Department of Labor (DOL), the WOTC is a general business credit provided under Code Sec. 51. The program is designed to encourage employers to hire and retain individuals from ten defined target groups, one of which includes qualified summer youth employees. The WOTC is available for wages paid to certain workers who commence employment before December 31, 2025.

Generally, the WOTC equates to 40% of the first $6,000 of wages paid to or incurred on behalf of an individual who: (1) is in their first year of employment, (2) is certified as being a member of a targeted group, and (3) performs at least 400 hours of services for the hiring employer. This means that the maximum tax credit an employer can receive is typically $2,400. The WOTC also provides a 25% credit rate for those employees who work fewer than 400 hours but at least 120 hours.

However, it's worth noting that the Treasury Department has recently proposed the elimination of this 25% credit. The rationale behind this proposal is the belief that this credit may promote the hiring of temporary workers, which contradicts the WOTC's objective of providing long-term work prospects for targeted groups. This proposal would apply to individuals hired after December 31, 2023, if approved.

To qualify as a summer youth employee under the WOTC, a worker must be: (1) at least 16 years old, but under 18 on the hiring date or on May 1, whichever is later; (2) employed by the business only between May 1 and September 15 (and not employed prior to May 1), and (3) a resident of an Empowerment Zone (EZ).

For an employer to claim the WOTC, they must pre-screen and obtain certification from the appropriate Designated Local Agency (also referred to as a State Workforce Agency or SWA) that the hired individual is a member of a targeted group. This pre-screening process involves the completion of a pre-screening notice (Form 8850, Pre-Screening Notice, and Certification Request for the Work Opportunity Credit) by both the job applicant and the employer.

The WOTC is limited to the amount of the business income tax liability or Social Security tax owed. Businesses can apply for the credit against their business income tax liability. Moreover, businesses may carry the current year's unused WOTC back one year and forward up to 20 years.

In conclusion, the WOTC provides a win-win situation for both employers and summer youth workers. It encourages businesses to offer employment opportunities to young people, particularly those residing in empowerment zones, while also providing financial benefits to employers by way of tax credits. However, the proposed changes to the WOTC program underscore the importance of staying abreast of tax law developments and consulting with a tax professional to maximize potential benefits.

If you need assistance leveraging federal tax credits this summer, contact us! We have resources to assist with the required certifications for claiming the Work Opportunity Tax Credit.