The Tax Relief and Health Care Act of 2006 (TRHCA) extended a significant number of tax benefits that had already expired or were about to expire. Among the more useful credits for businesses that can employ minimum wage or other economically disadvantaged workers are the work opportunity credit and welfare-to-work credit for tax years. TRHCA extended these credits for 2006 and then combined and amended them for 2007.

The Work Opportunity Credit

The Work Opportunity Credit, under Code Sec. 51, seeks to provide employers with an incentive to hire persons from targeted groups with a particularly high unemployment rate or other special employment needs. The credit targets eight groups for employment assistance, including qualified recipients under the temporary assistance for needy families program, food stamp and supplemental security income recipients, veterans, ex-felons, high-risk youth, vocational rehabilitation referrals, and summer youth employees.

The credit is equal to a percentage of qualified wages paid during the employee's first year of employment, based on the number of hours worked, for a maximum of $6,000 of wages paid to each individual. For example, with regard to targeted individuals hired on or before December 31, 2007, employers can claim a work opportunity credit equal to 40 percent of qualified wages paid during the employee's first year of employment, provided that the targeted employee performs at least 400 hours of service. For employees working fewer than 400 hours, but at least 120 hours, the credit is reduced to 25 percent. No credit is available for employees who work fewer than 120 hours.

Accounting for long-term family assistance

The Welfare-to-Work Credit under Code Sec. 51A was a nearly identical program, except that it was specifically aimed at recipients of long-term family assistance. TRHCA repealed Code Sec. 51A and merged the welfare-to-work credit into the work opportunity credit for 2007. Now, for tax year 2007, not only is the amount of the combined credit similar to the calculation for the work opportunity credit, but it also includes provisions for recipients of long-term family assistance.

From 1997 through 2006, employers were allowed to claim a welfare-to-work credit for 35 percent of the first-year wages and 50 percent of the second-year wages paid or incurred to individuals who were long-term family assistance recipients. For tax year 2007, the combined credit under TRHCA only includes 50 percent of the second-year wages of long-term family assistance recipients, but it also increases the maximum credit per employee to $10,000.

Please call our offices if you want further information on how your business might qualify for the Work Opportunity Credit.