November 23, 2011
President Signs Law Repealing Government Withholdings and Extends Work Opportunity Tax Credits
On November 21, 2011, President Obama signed the Three Percent Withholding Repeal and Job Creation Act. The new law repeals the three percent withholding on government contractors and expands tax incentives to employers to hire military veterans. This Act had overwhelming support within the House and Senate.
In 2005, The Tax Increase Prevention and Reconciliation Act enacted a 3% government withholding requirement on certain payments to government contractors and service providers. This law was delayed many times and this new Act has repealed the provision as if it were never enacted. The highly criticized withholding requirement was deemed to be difficult to comply with and compromised privacy.
The Work Opportunity Tax Credit (WOTC), which was scheduled to expire as of December 31, 2011, rewards employers with tax credits for hiring certain individuals from targeted groups such as:
- Families receiving Temporary Assistance for Needy Families (TANF)
- Qualified veterans (certain veterans receiving food stamps and certain veterans with service-connected disabilities)
- Qualified ex-felons
- Designated community residents
- Vocational rehabilitation referrals
- Qualified summer youth employees
- Qualified food stamp recipients
- Qualified Supplemental Security Income recipients
- Long-term family assistance (TANF) recipients
The WOTC program generally offers a credit of up to 40 percent of wages for workers employed for 400 hours or more, capped at $2,400 for most adult hires and $4,800 for unemployed disabled veterans.
The Three Percent Withholding Repeal and Job Creation Act enhances the WOTC by creating two new credits: The Returning Heroes Tax Credit and the Wounded Warriors Tax Credit and includes credits of up to:
- $4,800 for hiring veterans with have been unemployed for at least four weeks
- $5,600 for hiring veterans who have been unemployed for at least six months, and
- $9,600 for hiring veterans with disabilities who have been unemployed at least six months.
The Act also extends the WOTC expiration dates through 2012 and 2013 for veterans and allows the credits to apply for tax exempt employers. The application provisions and use of Form 8850, Pre-Screening Notice and Certification has not changed.
The cost of the withholding repeal and the expansion of the WOTC will be offset by modifying income limitations for federal health care premium credit programs and delaying fee reductions for VA mortgage applications.
The $12.8 billion cost of repeal of government withholding and the veterans’ tax incentives is off set by modifying the calculation of modified adjusted gross income (AGI) for determining certain federal health care program eligibility, as well as delaying scheduled reductions in fees for VA mortgage applications.