As the U.S. economy rebounds, the roofing industry’s workforce challenges continue to be exacerbated by an increase in demand for roofing services, competition from high unemployment compensation and stimulus checks, some workers’ fears of returning to work, and lack of childcare options after the COVID-19 pandemic. And many business owners are struggling to entice workers to come back to work.
Some governors are offering back-to-work bonuses to combat these challenges and not using the federal government’s enhanced unemployment insurance benefits. Some large businesses also are offering workers signing bonuses, but that is not necessarily a viable option for small businesses. However, thanks to an obscure federal tax credit, it could be.
The nonrefundable Work Opportunity Tax Credit allows employers that hire qualified individuals to claim a tax credit equal to a portion of those workers’ wages. Eligible individuals include recipients of federal benefits such as the Supplemental Nutrition Assistance Program and Temporary Assistance for Needy Families, as well as ex-felons, qualified veterans and other long-term unemployed individuals.
The Work Opportunity Tax Credit has been around since 1996 and recently was extended through 2025. The credit reduces the amount of federal taxes owed and may be a useful tool for employers that wish to entice workers with hiring bonuses.
How it works
The Work Opportunity Tax Credit is calculated as a percentage of qualified wages paid to an employee during his or her first year of employment up to a statutory maximum and for an employee who has worked at least 120 hours during his or her first year of employment. If an employee worked at least 400 hours during his or her first year, an employer may claim a credit equal to 40% of that employee’s qualified wages up to the maximum amount allowed. If an employee worked between 120 and 399 hours, the employer may claim a credit equal to 25% of the employee’s qualified wages.
The most common wage ceiling is $6,000 (with the maximum credit for this wage ceiling at $2,400) though some populations are eligible for a higher or lower maximum. The statute defines the maximum amount of qualified wages eligible for the credit, so the maximum credit is equal to 40% of these limits. The limit of wages eligible varies by worker characteristics. For example, some veteran categories have a wage ceiling up to $24,000, allowing for a maximum credit of $9,600.
Legislation has been introduced in Congress to expand the eligibility and size of the Work Opportunity Tax Credit and to make the credit permanent. For example, one bill would expand the size of the Work Opportunity Tax Credit to 50% of the first $10,000 of eligible wages earned for two years and allow employers to receive the credit for former workers they hire back. Another bill would add an eligibility category for individuals who have been unemployed because of the pandemic. NRCA continues to monitor these developments as Congress seeks tools to address workforce challenges.
Claiming the credit
If you are interested in claiming the tax credit for an employee, you must have the worker certified as eligible with your state workforce agency by submitting Form 8850 to the agency within 28 days of employment. The state agency will verify whether your employee qualifies and certify your application if he or she does. The business owner claims the credit as part of the General Business Credit, and the credit can be carried back one tax year or forward up to 20 tax years.
In fiscal year 2020, about 1.62 million workers were certified as eligible for the Work Opportunity Tax Credit. However, some of these workers may not meet the minimum required hours worked so the number of employers receiving the credit is likely smaller.
If your business is organized as a pass-through business, as many NRCA members are, the credit can be taken on your federal and state individual tax returns against the taxes you owe. But it also can be used to offset payroll taxes, so for-profits and nonprofit organizations also are able to take advantage.
As you move through the hiring process for a new employee, NRCA recommends you find out whether the individual falls into an eligible credit category and calculate the credit in advance of hiring the worker. Then, you can decide if you would like to provide the future tax credit benefit as a hiring bonus. These bonuses can be quite large and may make all the difference as you grow your team.