Hiring new employees can be a difficult undertaking for businesses, especially amid the economic fallout caused by the ongoing coronavirus pandemic. However, the Work Opportunity Tax Credit (WOTC) is an often-overlooked tax break for employers that presents greater saving opportunities than ever before.
This tax credit was originally part of a group of temporary tax incentives that Congress typically extends each year. However, the Consolidated Appropriations Act (CAA) in 2020 extended the credit through 2025. Therefore, to make the most of WOTC and secure significant tax savings, employers need to be able to identify those candidates who fall within the targeted groups and promptly take the steps needed to obtain certification.
Work Opportunity Tax Credit Basics
The WOTC program is designed to encourage employers to hire workers from certain target groups that historically have experienced trouble finding a job. The amount of the credit is based on wages paid to the eligible employee, and the maximum allowed per employee can go up to $9,600, depending on the target group and the qualified wages paid to the new employee.
New hires must work at least 120 hours before employers can claim WOTC and the credit is generally equal to 25% of the first-year wages paid to a certified individual until they surpass 400 hours, at which time the credit increases to 40% of their first-year wages. No cap applies to the number of new hires who can qualify, nor to the amount of credit that can be claimed or generated. In order to treat a new hire as a member of a targeted group, an employer must:
- Obtain certification from the state workforce agency that the individual is a member of a target group on or before the first day of work, or
- Complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Tax Credit, on or before the day employment is offered and submit the notice to the state workforce agency to request certification within 28 days after the individual starts work.
To be eligible for the credit, a new employee has to be certified as a member of one of the following target groups:
- Qualified IV-A Recipient,
- Qualified Veteran,
- Designated Community Resident (DCR),
- Vocational Rehabilitation Referral,
- Summer Youth Employee,
- Supplemental Nutrition Assistance Program (SNAP) Recipient,
- Supplemental Security Income (SSI) Recipient,
- Long-Term Family Assistance Recipient, or
- Long-Term Unemployment.
There are exclusions that apply to the list of WOTC target groups. Employers who rehire a former employee, a family member or dependent, or someone who will be a majority owner in the business may not be able to claim the tax credit for that individual even if the individual is otherwise a member of a target group.
To claim WOTC, most for-profit employers use Form 5884 to calculate their allowable credit. On the other hand, tax-exempt employers are generally not eligible for the WOTC. However, they can claim the credit by using Form 5884-C when hiring qualified veterans. WOTC is allowed against the Old Age, Survivors, and Disability Insurance program often referred to as the Social Security tax owed by tax-exempt employers. The credit is calculated in the same way it would be if employers were not tax-exempt, with a few modifications:
- 26% instead of 40% for qualifying first-year wages, and
- 16% instead of 25% for a qualified veteran who has completed at least 120 hours but less than 400 hours of service for an employer.
Realizing WOTC Benefits
Claiming the WOTC can save companies a significant amount of taxes, especially if their business is expanding and likely to attract some or many of the targeted employee groups the credit is designed to help. Furthermore, the WOTC program is intended to provide incentives for employers to hire certain candidates who find it difficult to get jobs. As a result, companies can benefit the community by providing economic opportunities and enhancing their organization’s reputation by helping individuals who need support.
The Work Opportunity Tax Credit management process can be streamlined for both applicants and employers by automating the process to allow businesses to efficiently capture tax credit opportunities. As a result, employers can remove the burden of tracking and filing for the credit and meet the necessary deadlines. Furthermore, they can realize the benefits without increasing staff to handle the tax credit paperwork and filings while a team of experts can help them identify any additional federal, state, or local benefits that are not being utilized.