As a small business, staying on top of things and getting the help you need can be challenging and expensive.
The Work Opportunity Tax Credit (WOTC) is an avenue for you to get the help you need with individuals who need employment. The great thing is that the WOTC is a federal tax incentive that benefits those workers and your business.
The WOTC has two main purposes:
To promote the hiring of individuals who qualify as a member of a target group.
To provide a federal tax credit to employers who hire these individuals.
Employers who hire members of these targeted groups who meet the criteria for the program could be eligible to claim federal tax credits against their wages. The program is authorized until December 31, 2025.
Employers can find candidates in these groups by connecting with American Job Centers, social service offices, vocational rehab agencies, Veterans Affairs, and Veterans-related service agencies, the Department of Corrections, recipients of the Workforce Innovation and Opportunity Act (WIOA) grants, and state workforce agencies. These are participating agencies of the program.
There are different incentives available for employers beyond the tax credits, such as the Federal Bonding Program (FBP) which provides free fidelity bonds when hiring certain applicants.
What is the WOTC?
The WOTC is a federal tax credit incentive for private sector employers who hire American job seekers consistently facing barriers to employment. These employers can meet their business needs and claim tax credits for hiring individuals in a Work Opportunity Tax Credit targeted group.
Due to the difficulty of capturing these credits, most companies do not even attempt to get them. To become eligible, qualifying employees must complete the 8850s in time plus work a minimum of 120 hours. These tax credits range between $2400 and $9600 per employee.
Group A: Individuals who qualify for short-term Temporary Assistance to Needy Families (TANF)
Group B: Individuals who fall under qualified veterans
Group C: Individuals who are qualified ex-felons
Group D: Individuals who qualify as a designated community resident
Group E: Individuals who qualify under a vocational rehabilitation referral
Group F: Individuals who qualify as a summer youth employee
Group G: Individuals who are qualified food stamp (SNAP) recipients
Group H: Individuals who qualify for receiving Supplemental Security Income (SSI)
Group I: Individuals who are qualified long-term family assistance recipients
Group L: Individuals who are qualified long-term unemployment recipients under this new addition to the program.
Special rules may apply to summer youth, certain veterans, and recipients of long-term family assistance. These individuals have increased first-year wage limits. Long-term family assistance recipients also qualify for 50% of second-year wages up to $10,000.
How Do I Get Started?
There are a few steps involved in setting your business up to receive the tax credit:
Get the eligibility criteria for the WOTC targeted groups. Information can be located on the IRS website.
Next, connect with a job candidate who falls within the list of qualified groups and meets the hiring criteria. These candidates can be found through one of the previously listed agencies or organizations.
The business must file a WOTC application for certification with the state’s workforce agency or with the U.S. Department of Labor WOTC website. There is a series of forms that must also be completed.
Once the WOTC certification for eligible new hires has been approved, an employer claim can be filed for the credit after the employee’s first year of employment. Employers must have a certification that verifies the new hire prior to claiming the tax credit.
This works because you make the final hiring decision on who works for your company. You are not obligated to hire anyone that’s presented from one of the organizations. You can hire as many qualified workers as you need, and you have a wide pool of choices.
There are a few wages that don’t qualify for the tax credit calculation. For qualification, the employer must pay Federal Unemployment Tax Act (FUTA) taxes, and they must be wages paid by the employer, including OJT participants. Any on-the-job-training wages received from another party or indirectly paid through the employer do not qualify.
It’s important to work with the agencies listed or have specific questions for new hires that could possibly be qualified for you to claim these tax credits. If your business claims the WOTC, your federal income tax deduction must be reduced dollar for dollar. In some cases, it may be more advantageous to forego claiming the credit. Your tax professional is better suited to determine whether you should take the credit or not based on your current financials and to make sure you comply.
A successful program, many small businesses have taken advantage of the tax credits which help business owners and individuals seeking permanent employment. In 2020 alone, over 1.6 million WOTC certifications were issued to employers participating in the program. Due to the difficulty of capturing these credits, most companies do not even attempt to get them. To become eligible, qualifying employees must complete the 8850s in time plus work a minimum of 120 hours.
For a small percentage of credits captured, TPC can efficiently qualify new hires and track credits for you. Take the burden off your shoulders and let us do the heavy lifting.