Tax Edge

By Robert Steere, Toolkit Staff Writer

A popular tax break for employers has undergone legislative amendment and expansion this year, and the Internal Revenue Service (IRS) recently offered guidance for implementation of the changes.

The IRS clarified for employers its guidance on implementing new provisions of the Work Opportunity Tax Credit (WOTC). Employers are being given until October 17 to meet certification requirements with respect to any pre-September 17 hiring of unemployed veterans or disconnected youth, according to an IRS notice dated August 13. This provides relief from the typical, more stringent certification timeframes, and will make it easier for employers to claim the related WOTC on these new categories of employees.

Employers are allowed a tax credit (the WOTC) equal to 40 percent of qualified first-year wages paid during any year to employees from certain targeted groups. The maximum tax credit per employee is typically $2,400 ($4,800 for certain qualifying veterans and $1,200 for certain qualified summer youth employees). An employer can take the tax credit with respect to a new employee only if it receives certification from a state employment security agency that the person hired belongs to one of the targeted groups. Typically, if the person being hired is not pre-certified, the employer must provide documentation to the state employment security agency within 28 days after hiring the person in order to obtain certification.

Earlier in the year, as part of the stimulus package, Congress expanded the scope of the WOTC for 2009 and 2010 to cover the employment of two additional targeted groups--unemployed veterans and disconnected youth. Because the new provisions were enacted in mid-February, but effective for any employment on or after January 1, the IRS had to develop transitional rules for the certification procedure.

In May, the IRS provided guidance for implementation of the WOTC for unemployed veterans and disconnected youth. In the IRS notice, the definitions of the two groups were clarified. In addition, the notice provided some transitional relief, modifying the certification requirements so that any employer hiring an unemployed veteran or a disconnected youth in 2009 prior to July 17, 2009, could satisfy the certification requirement by submitting necessary documentation to the state employment security agency by August 17, 2009.

In its notice dated August 13, the earlier guidance was clarified and revised. First, the definition of 'disconnected youth' was revised so that an individual with a high school diploma or GED certificate earned at least six months prior to the hiring date, and who otherwise satisfies the requirements, will not fail to qualify as a disconnected youth merely because of occassional employment since receipt of the diploma or certificate.

Second, the transitional relief provided in the earlier notice from the certification requirements was extended. Now, any employer who hires an unemployed veteran or disconnected youth in 2009 prior to September 17, 2009, will be deemed to satisfy the certification requirement if the employer submits the necessary documentation (a pre-screening notice) to the state employment security agency by October 17, 2009.

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