Volume 7, Number 1, Winter-Spring 1998
The 1997 Taxpayer Relief Act provides employers an income tax credit on eligible wages paid to qualified recipients of long-term family assistance (formerly called Aid to Families with Dependent Children, now Temporary Assistance to Needy Families) during their first 2 years of employment. The new welfare-to-work tax credit is equal to 35% of the first $10,000 of wages in the first year of employment and 50% of the first $10,000 of eligible wages in the second year of employment. The maximum credit is therefore $8,500 ($3500 + $5000) per qualified employee. The employee must be retained at least 180 days or 400 hours within the employer's accounting year.
The welfare-to-work tax credit is effective for wages paid to a qualified person starting work for an employer between January 1, 1998, and May 1, 1999. Qualified persons include: (1) members of a family that has received family assistance for at least 18 consecutive months ending on the hiring date; (2) members of a family that has received family assistance for a total of at least 18 months (whether or not consecutive) after August 5, 1997, if they are hired within 2 years after the date the 18-month total is reached; and (3) members of families who are no longer eligible for family assistance because of federal or state time limits, if they are hired within 2 years after such limit made the family ineligible for assistance.
Prospective employees do not have to inform employers about their own or their family's history of welfare receipt. Their cooperation in helping secure the credit is voluntary. If an applicant is willing, have him or her complete the U.S. Labor Department's "Individual Characteristics Form," ETA-9061 (Revised 11/97). If information on Form ETA-9061 shows the applicant may meet requirements for one or more target groups, complete IRS Form "Pre-Screening Notice and Certification Request." In California, request Forms ETA-9061 (DE 8725) and 8850 on 916/654-9715. In other states, call your Department of Labor or Employment Service office or 202/219-9092 ext. 137.
Applicants having a "Confidential Certification, Work Opportunity and Welfare-to Work Tax Credit" Form ETA-9062 have already been certified as eligible by a state agency. Complete the employer portion of Form ETA-9062.
To facilitate their job search, AFDC and/or food stamp recipients should consider having their Department of Social Services case worker complete the Form ETA-9062, eliminating the need for an employer to seek and complete the Form ETA-9061. All county social services department directors received instructions in completing certifications on Form ETA-9062 in Memo DSS-97-40 (July 21, 1997).
To receive certification that a new employee qualifies the employer for tax credit, the employer should complete and sign Forms 8850 and ETA-9061 (or 9062) by the day the job offer is made and, within 21 days of the employee's start date, mail them (in California) to: WOTC Center, P.O. Box 1408, Roseville, CA 95661 (telephone 916/774-4374; fax 916/786-6177). If the applicant meets the criteria, the Center will send the employer a tax credit certification form. Keep these certifications and supporting documents for 5 years from the certification date.
Employers claim the welfare-to-work credit on IRS Form 8861. Employers who can't take the full tax credit amount in the current tax year may claim a refund of all or part of taxes paid in the last 3 years. Unused credit is carried back to the earliest of the last 3 tax years, then to the second earliest, and so on. Credit that can't be taken in these years may be carried forward for up to 15 years until all the credit is used.
The welfare-to-work tax credit could lower the after-tax cost of employing qualified long-term welfare recipients by 15% to 35% over the first 2 years. The amount of savings, if any, hinges on the number of hours the worker is employed and the employer's marginal federal income tax rate. The employer's business deduction for hired labor expense must be reduced by the amount of any credit claimed.
Employers may want to weigh anticipated income tax savings against any projected differences in worker training costs and productivity.
Also see accompanying article by Brian Linhardt, "Will CalWORKS Work for Agriculture?"