Publications
12.02.11
New law repeals 3% withholding rule for government contractors, boosts credit for hiring veterans
On November 21, the President signed into law H.R. 674, the “3% Withholding Repeal and Job Creation Act” (the Act). This alert discusses two of the issues dealt with in the Act. The Act repeals a controversial 3% withholding requirement on government contractor payments and amends the Code Sec. 51 work opportunity tax credit (WOTC) to give employers a bigger credit for hiring certain qualified veterans through Dec. 31, 2012. We briefly discussed this credit in our Client Alert dated November 21, 2011.
Repeal of 3% Withholding Rule for Government Contractors
Old law. Prior to the enactment of this law, there was a requirement starting in 2012 that would require the Federal government and the government of every state, political subdivision of a state, and instrumentality of a state or state subdivision (including multi-state agencies) making certain payments to a person providing any property or services (e.g., payments to a government contractor) to deduct and withhold 3% from that payment.).
New law. Act Sec. 102 repeals the 3% withholding requirement, effective for payments made after 2011.
Enhanced Work Opportunity Tax Credit (WOTC) for Hiring Qualified Veterans
Old law. Under pre-Act law, the work opportunity tax credit (WOTC) allows employers who hire members of certain targeted groups, including qualified veterans, to get a credit against income tax of a percentage of qualifying first-year wages up to $6,000 per employee ($12,000 for certain qualified veterans; and $3,000 for qualified summer youth employees). Generally, the percentage of qualifying wages is 40% of first-year wages, for a maximum WOTC of $2,400 (.4 × $6,000), or $4,800 for certain qualifying veterans (.4 × $12,000); it's 25% for employees who have completed at least 120, but less than 400, hours of service for the employer. Different rules apply for recipients of long-term family assistance.
The individual must begin work for the employer before Jan. 1, 2012 for the WOTC to apply. Under pre-Act law, the WOTC is not available for tax-exempt employers.
New law. The Act extends the WOTC for hiring qualified veterans, broadens the classes of qualified veterans and increases the WOTC for hiring some of them, “fast-tracks” the qualification process for qualified veterans, and provides tax-exempt employers with a credit against payroll tax for hiring qualified veterans.
Extension of WOTC for hiring qualified veterans. Under the Act, employers will be able to claim the WOTC for qualified veterans who begin work for the employer before Jan 1, 2013.
Broadened categories of qualified veterans. Under the Act, effective for individuals who begin work for the employer after Nov. 21, 2011, a qualified veteran is a veteran who is certified by the designated local agency as falling within one of the following four categories:
(1) The individual is a member of a family receiving assistance under a food stamp program under the Food Stamp Act of '77 for at least three months, all or part of which is during the 12-month period ending on the hiring date.
(2) The individual is entitled to compensation for a service-connected disability, and either:
(a) has a hiring date that isn't more than one year after having been discharged or released from active duty in the U.S. Armed Forces, or
(b) has aggregate periods of unemployment during the 1-year period ending on the hiring date that equal or exceed six months.
(3) The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed four weeks (but less than six months).
(4) The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months.
Larger WOTC for hiring certain qualified veterans. Under the Act, effective for individuals who begin work for the employer after Nov. 21, 2011, the maximum amount of qualifying first-year wages against which the WOTC may be claimed is:
(A) $12,000 for an individual who is a qualified veteran who is entitled to compensation for a service-connected disability and has a hiring date that isn't more than one year after having been discharged or released from active duty in the U.S. Armed Forces. Thus, the maximum WOTC for hiring qualified disabled veterans in Category A is $4,800 (.4 × $12,000 maximum qualifying first-year wages).
(B) $24,000 for an individual who is a qualified veteran who is entitled to compensation for a service-connected disability and has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months. Thus the maximum WOTC for hiring qualified disabled veterans in Category B is $9,600 (.4 × $24,000 maximum qualifying first-year wages).
(C) $14,000 for an individual who is a qualified veteran who has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months. Thus the maximum WOTC for hiring qualified veterans in Category C — i.e., longer-term unemployed veterans — is $5,600 (.4 × $14,000 maximum qualifying first-year wages).
Tax-exempt employers get a payroll-tax credit for hiring qualified veterans. Under the Act, effective for individuals who begin work for the employer after Nov. 21, 2011, a tax-exempt employer (one described in Code Sec. 501(c) and exempt from tax under Code Sec. 501(a) ) may, subject to the limits described below, claim a credit for the WOTC it could claim for hiring qualified veterans if it were not tax-exempt. The credit is allowed against the OASDI (Social Security) tax that the exempt employer would otherwise have to pay on the wages of all its employees during the “applicable employment period” (with respect to any qualified veteran, the one-year period beginning with the day he or she goes to work for the tax-exempt organization).
The credit for hiring qualified veterans, which can't exceed the OASDI tax otherwise payable for employment of all the tax-exempt's employees during the “applicable employment period,” is calculated as it would be under Code Sec. 51 , but with the following modifications:
• The general credit percentage of qualifying first-year wages is 26% (instead of 40%).
• The credit percentage of qualifying wages is 16.25% (instead of 25%) for a qualified veteran who has completed at least 120, but less than 400, hours of service for the employer.
The tax-exempt employer may only take into account wages paid to a qualified veteran for services in furtherance of the activities related to the purposes or function constituting the basis of the organization's exemption under Code Sec. 501 .
Please contact our office at 703.893.0600 to discuss how the tax incentives in the new law may benefit you.
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