Do Companies Get a Tax Break for Hiring Felons? The Unvarnished Truth

Yes, companies can indeed get a tax break for hiring individuals with a criminal record, although it’s not quite as simple as a blanket, “hire a felon, get a tax credit” scenario. The primary mechanism is the Work Opportunity Tax Credit (WOTC), a federal tax credit designed to incentivize employers to hire individuals from specific target groups who face significant barriers to employment. One of these target groups is individuals with a felony conviction. Let’s delve into the specifics, cutting through the bureaucratic red tape and providing you with the practical insights you need.

Understanding the Work Opportunity Tax Credit (WOTC)

The WOTC isn’t just for hiring anyone; it’s strategically aimed at helping certain demographics re-enter the workforce and, consequently, reducing reliance on government assistance programs. The program is authorized and reauthorized periodically by Congress, so staying updated on its status is crucial. As of my last update, it’s generally consistently renewed.

How the WOTC Applies to Hiring People with Felony Convictions

The WOTC specifically targets individuals with felony convictions who have had significant difficulty finding employment. Here’s the critical criterion:

• Ex-Felon Target Group: The individual must have been convicted of a felony under any state or federal law and have either:
  • Been convicted of a felony and have a hiring date within one year of being convicted or released from prison.
  • Are members of a family that meet the Economic Targeted Area criteria, which is a specific geographical area that the government has deemed as an area with high economic depression.
  • Have a family income that is below a specific amount.

It’s crucial to understand these specific eligibility requirements. You can’t just hire anyone with a past felony and expect the credit.

Calculating the WOTC: What’s the Actual Benefit?

The WOTC is generally calculated as a percentage of the qualified wages paid to the employee during the first year of employment. The exact percentage and maximum credit amount can vary depending on how long the employee works:

• Typically, the credit is 40% of the first $6,000 in wages paid to the employee during their first year. This means the maximum credit is $2,400 per eligible employee.
• For employees who work fewer than 400 hours, but at least 120 hours, the credit is reduced to 25% of the first $6,000 in wages, resulting in a maximum credit of $1,500.
• If the employee works less than 120 hours, the company doesn’t get the tax break.

Important Note: These figures are subject to change based on Congressional action and the specific details of the WOTC legislation in effect. Always consult the most current IRS guidance and your tax advisor.

The Pre-Screening and Certification Process: Don’t Skip This Step!

The WOTC isn’t automatic. Employers must follow a specific process to claim the credit. The most important step is pre-screening potential employees before they are hired. This involves completing IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” on or before the date the job is offered to the candidate.

Then, you must submit this form to your state’s workforce agency for certification. The state agency will determine if the employee meets the eligibility criteria. You must receive certification before you can claim the credit. Failure to follow this process can result in the denial of the tax credit.

Beyond the WOTC: State-Level Incentives

While the WOTC is the primary federal incentive, many states also offer their own tax credits and programs to encourage the hiring of individuals with criminal records. These programs can vary significantly from state to state in terms of eligibility requirements, credit amounts, and application procedures. Researching your state’s specific offerings is highly recommended. These may include bonding programs (insurance against potential employee dishonesty) or direct subsidies for training and employment.

The Bottom Line: Is it Worth It?

The WOTC, combined with potential state-level incentives, can provide a significant financial benefit to companies willing to hire individuals with felony convictions. However, the true value extends beyond the dollars and cents. By offering a second chance, companies can tap into a valuable talent pool, reduce recidivism, and contribute to a more just and equitable society. The WOTC is not just about getting a tax break; it’s about building a stronger community and workforce.

Frequently Asked Questions (FAQs) about Companies Getting Tax Breaks for Hiring Felons

Here are some frequently asked questions regarding tax breaks for companies hiring felons:

1. What are the main benefits of hiring individuals with felony convictions beyond the WOTC?

   Beyond the tax credits, hiring individuals with criminal records can help reduce recidivism rates, tap into a potentially overlooked talent pool, and improve the company’s public image by demonstrating a commitment to social responsibility.

2. Are there any industries or job types that are excluded from the WOTC for ex-felons?

   Generally, the WOTC doesn’t exclude specific industries. However, there might be restrictions on hiring relatives or individuals who were previously employed by the company. Additionally, the job must be a bona fide employment opportunity.

3. What if the employee I hired with the WOTC is terminated before the end of the year? Do I still get the full tax credit?

   You only get the WOTC for wages paid during the eligible period. If the employee is terminated, you would only be able to claim the credit for the wages paid up to the termination date, provided they worked at least 120 hours.

4. How does the WOTC interact with other government programs or incentives?

   The WOTC can generally be combined with other federal and state programs, but it is important to check the specific rules of each program to ensure that there are no conflicts or restrictions on stacking benefits.

5. What are some common mistakes employers make when trying to claim the WOTC for hiring ex-felons?

   Common mistakes include failing to complete the pre-screening process before the job offer, not submitting the necessary forms to the state workforce agency in a timely manner, and misinterpreting the eligibility criteria for the ex-felon target group.

6. Where can I find the most up-to-date information about the WOTC and its eligibility requirements?

   The IRS website (www.irs.gov) and your state workforce agency are the best sources for current information about the WOTC. You should also consult with a qualified tax professional.

7. Are there any privacy concerns when asking potential employees about their criminal history for WOTC purposes?

   Yes, there are privacy considerations. Employers should only ask about criminal history after a conditional offer of employment has been made. It is also important to be mindful of state and local laws regarding ban-the-box initiatives, which restrict when employers can inquire about an applicant’s criminal record. Ensure compliance with EEOC guidelines to avoid discrimination claims.

8. What is a “ban-the-box” law, and how does it affect the WOTC process?

   “Ban-the-box” laws restrict when employers can ask about an applicant’s criminal history. While they don’t eliminate the WOTC, they may delay the process of determining eligibility until later in the hiring process, potentially increasing the risk of missing the pre-screening deadline. The laws only affect the initial stages of hiring and asking about the past criminal records of employees. The employer is still eligible for the WOTC if the employee is approved later in the hiring process.

9. Does the type of felony conviction matter for WOTC eligibility?

   Generally, the type of felony conviction itself doesn’t matter, as long as it’s a felony under state or federal law. The key is whether the individual meets the other eligibility criteria (time since conviction/release, economic disadvantage, etc.).

10. If I hire someone who has been expunged, can I still get the WOTC?

    The eligibility for WOTC depends on whether the individual is still legally considered to have a criminal record. Expungement laws vary by state, but in general, if the record is truly expunged and the individual can legally deny having a criminal record, they may not be eligible for the WOTC under the ex-felon target group. Consult with a legal expert to understand your state’s expungement laws.

11. What is the role of a third-party WOTC administrator, and is it worth the cost?

    Third-party WOTC administrators can handle the entire application process, from pre-screening to certification. The cost-effectiveness depends on the volume of hiring, the complexity of your business, and your internal resources. For larger companies, it can be a worthwhile investment to ensure compliance and maximize credit opportunities.

12. Are there any reporting requirements or audits associated with claiming the WOTC?

    Yes, employers are required to keep records to support their WOTC claims, including documentation related to the employee’s eligibility. The IRS can audit these claims, so it is essential to maintain accurate and complete records.

This information is intended to provide a general overview of the WOTC and is not a substitute for professional legal or tax advice. Always consult with qualified professionals to ensure compliance with applicable laws and regulations.