The Work Opportunity Tax Credit (WOTC) is a tax credit program initiated by the federal government through the Internal Revenue Service to increase employment opportunities for specific groups of people who might otherwise find barriers to employment. As a business owner, if you hire an employee from one of the target groups outlined by the WOTC program, you are eligible to receive a one-time tax credit for your new hire—and each qualified new hire you make. Here is an overview of what you need to know about the Work Opportunity Tax Credit.
As an employer, you can hire employees from the following groups to be eligible to receive a Work Opportunity Tax Credit:
- Qualified IV-A Recipient – An individual belonging to a family receiving relief in the form of Temporary Assistance for Needy Families (TANF)
- Qualified Veteran – A veteran meeting any of the following qualifications:
- Disabled veteran
- Unemployed disabled veteran
- Veteran belonging to a family receiving food stamps under the Supplemental Nutrition Assistance Program (SNAP)
- Short-term unemployed veteran (four weeks)
- Long-term unemployed veteran (six months)
- Qualified veteran discharged from active duty within one year of hire date
- Designated Community Resident (DCR) – An individual who, upon the date of hire, resides within an Empowerment Zone, an Enterprise Community, or a Renewal Community and who continues to reside in such location after hire.
- Vocational Rehabilitation Referral – A person with a physical or mental disability who has been referred to the employer while receiving or upon completion of rehabilitative services
- Summer Youth Employee
- Supplemental Nutrition Assistance Program (SNAP) Recipient
- Supplemental Security Income (SSI) Recipient
- Long-Term Family Assistance Recipient
- Qualified Long-Term Unemployment Recipient
How Much Can an Employer Save?
An employer can receive a federal tax credit from the Work Opportunity Tax Credit program up to $9,600 for each eligible new hire depending on the target group of the individual. The WOTC will be calculated based on a percentage of the new hire’s wages. There is no limit to the number of eligible new hires for whom an employer can claim a tax credit.
What Are the Hiring Qualifications?
In addition to hiring a new employee from one of the target groups, the WOTC program requires that the new hire work at least 120 hours in the first year of employment. The new hire can be a temporary, seasonal, or part-time employee. Any job position is eligible for the program.
How Can an Employer Claim the Work Opportunity Tax Credit?
An employer must obtain certification that an individual is a member of an eligible group before the employer may claim the tax credit. The employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work.
Qualified tax-exempt organizations will claim the credit on Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, as a credit against the employer’s share of Social Security tax.
After a taxable employer secures the required certification, he or she will claim the tax credit as a general business credit on Form 3800 against their income tax by filing Form 5884 (with instructions) and Form 3800 (with instructions), plus the business’s related income tax return and instructions.
Employers claim the Work Opportunity Tax Credit against federal taxable income for the year the credit is awarded, not the year the qualified employee was hired.
Unused tax credit can be applied back one year and forward 20 years.
The federal tax credit is non-refundable. An employer should have existing tax liability against which to apply the tax credit.
For more information on the Work Opportunity Tax Credit, refer to this informational summary on the IRS website.
Are you interested in applying for the Work Opportunity Tax Credit but unsure of how to apply? Let the experts at Honest Buck Accounting help. Our accountants will help you put together a complete application for the WOTC so you can maximize your federal tax credits. Tax preparation and compliance is just one of our specialties. Schedule a call with us to learn how we can help you achieve your business accounting needs.