When business owners hear “Work Opportunity Tax Credit” (WOTC) most think right away they only qualify for this credit if they hire ex-felons or veterans. However, this is not the case. In addition to the traditional categories for the WOTC, a new hire qualifies just by living in a county that is identified as a rural renewal county. The business does not need to be located in the county, the qualification is based on where the employee lives. A rural renewal county is a county in a rural area that lost population during the 5-year periods 1990 through 1994 and 1995 through 1999. For South Dakota the following counties qualify as a rural renewal county: Aurora, Campbell, Clark, Day, Deuel, Douglas, Faulk, Grant, Gregory, Haakon, Hand, Harding, Hutchinson, Jones, Kingsbury, Marshall, McPherson, Miner, Perkins, Potter, Sanborn, Spink, Tripp, and Walworth. There are counties in over 30 states that qualify for this credit.
To qualify for the credit, you have to follow several rules. First, on the day the new hire accepts a job offer, they will need to complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. This completed form will need to be sent to the South Dakota Department of Labor. The State uses this form to certify the new hire is a member of a targeted group for purposes of qualifying for the work opportunity credit. The State will not accept the applicant if the employer waits and completes the form on the first date of employment. Second, the employee needs to be between the ages of 18 and 40, needs to work at least 120 hours from now through 12/31/19 for the business, and the employee cannot be a dependent or relative to the business owner. The credit is calculated on form 5884 and filed with the federal income tax return for the business. If the business is an S corporation or partnership, the credit will flow through on a K-1 and be taken on the owner’s individual tax return.
Now that you know the rules, what is the benefit? If the employee is paid at least $6,000 of qualified wages and works at least 400 hours, the employer can get a $2,400 credit. The credit is reduced if the employee has less than 400 hours or less than $6,000 in wages. A perk to this credit, there is no cap on the number of eligible people an employer can hire or amount of tax credits that can be claimed each year.
Please consult with your Ketel Thorstenson tax professional if you have questions on the credit.