What Is The Work Opportunity Tax Credit?
Learn about the WOTC and see how your business can take advantage of this valuable tax credit by hiring people who may otherwise find it difficult to secure employment.
If you’re a small business owner, it’s that time of year when you’re probably trying to maximize the deductions on your taxes. In doing research on possible small business deductions, you might be wondering “what is the Work Opportunity Tax Credit, and do I qualify?” This post will walk you through the basics of what this credit (also known as the WOTC) is all about, and help you determine if you can claim it during this tax season. Even if you don’t qualify for the credit on this year’s taxes, it may be something to consider in your hiring practices down the road so you can receive the credit in the future. But let’s start by walking you through the program that many individuals and business owners may not even know exists.
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What Is The Work Opportunity Tax Credit?
The Work Opportunity Tax credit is a federal tax benefit given to businesses that have hired employees who have traditionally hit obstacles in the job market when seeking employment. If a business hires one or more employees that meet these specific qualifications, they may qualify for the federal tax credit.
To receive the credit, business owners must apply for and receive verification that an employee meets the criteria of one of the recognized targeted groups before they can claim the general credit.
How Does The Work Opportunity Tax Credit Work?
As mentioned, business owners need to apply for and receive certification that their new employee or employees qualify as a member of one or more of the accepted targeted groups. Once that certification is received, they can claim the WOTC as a business credit against income taxes. Employers who are tax-exempt can claim the WOTC against their payroll taxes.
What Types Of Employees Qualify For The Work Opportunity Tax Credit?
In order to qualify for the Work Opportunity Tax Credit, the employees you hire or currently employ need to fit into specific criteria. There are 10 groups of individuals who fit these criteria according to federal guidelines:
- Qualified IV-A Recipient: This is an individual in a family that has received Temporary Assistance For Needy Families (TANF) grants from the government.
- Qualified Veteran: A veteran who fits at least one of the following categories:
- Receiving food stamps for at least three months of the first 15 months of employment
- Unemployed for a period totaling at least four weeks, but less than six months in the year period ending on the hiring date
- Unemployed for a period totaling at least six months in the one-year period ending on the hiring date
- Disabled and entitled to compensation for a service-connected disability hired not more than one year after being discharged from active duty
- Disabled and entitled to compensation for a service-connected disability who is unemployed for at least six months of a one-year period ending on the hiring date.
- Qualified Ex-Felon: An individual hired within a year of being convicted of a felony or being released from prison for the felony.
- Designated Community Resident: An individual who, on the date of hiring, is at least 18 years old, resides in an Empowerment zone, Enterprise community, or Renewal community and continues to reside there after being hired.
- Vocational Rehabilitation Referral: An individual with a mental or physical disability who has been referred to the employer upon completing specific rehabilitative services.
- Summer Youth Employee: An individual who is at least 16 but under 18 on the date of hire or before May 1, whichever is later, and is only employed between May 1 and Sept. 15 who resides in an Empowerment zone, Enterprise community or Renewal community.
- SNAP Recipient: An employee who, on the date of the hire, is between 18 and 40 years of age and a member of a family receiving Supplemental Nutritional Assistance Program benefits (food stamps) for the previous six months or at least three of the previous five months.
- Supplemental Security Income Recipient: An employee who received SSI benefits for a month that is within 60 days of his or her hiring.
- Long-Term Family Assistance Recipient: An individual from a family that received assistance under an IV-A program for a minimum of 18 consecutive months prior to hiring.
- Qualified Long-Term Unemployment Recipient: An individual who has been unemployed for at least 27 consecutive weeks at the time of hiring and who received unemployment benefits for at least some point of that period.
Any employees who worked for fewer than 120 hours are not eligible to claim for the WOTC. The employer must have had a tax liability for the employee in order to claim the credit.
How To Apply For The Work Opportunity Tax Credit
While some of the qualifications for determining what employees are eligible for the Work Opportunity Tax Credit may be a bit confusing, the actual application process is relatively straightforward. After you have completed a screening for your employees, everything can be done online through the Department of Labor and the paperwork is fairly straightforward. Here is a brief walk-through of the process:
Perform A Work Opportunity Tax Credit Screening For Eligible Employees
If you are planning on hiring an employee that will make you eligible for the Work Opportunity Tax Credit, you will need to provide them with a screening form along with their initial employment paperwork. The potential employee will provide some basic information like date of birth, address, and social security number, to help determine the individual’s eligibility. You have 28 days from an employee’s start date to fill out Form 8850 to make sure your employee qualifies. Some recruiting software actually provides this screening service for employers and it can all be handled online.
Determine Which Wages Count Towards The Tax Credit
In order for an employee’s wages to count towards the Work Opportunity Tax Credit, he or she will need to work at least 120 hours. If they work between 120 and 400 hours, you can claim 25% of their allowable wages. If they work at least 400 hours, you are allowed to claim 40% of allowable wages. Depending on what targeted group your employee falls under, the maximum amount of wages you can claim will vary. For ex-felons, you can claim 40% of allowable wages, up to $6000 (or $2400 total). For a long term SNAP recipient, you can claim 40% of allowable wages up to $10,000 (or $4000 total). And there is no limit on the number of employees you can claim for the credit as long as they are all eligible.
Make Sure You Aren’t Doubling Up On Tax Credits
In most cases, the same wages that are claimed for the WOTC may not be used in any other tax credit program. However, you may be able to use the same employee for multiple tax credits. To do this, you need to be sure that you are using different wages per credit. For example, if you are using $6000 in wages to claim the full WOTC benefit, you may use additional wages for another eligible credit.
If you’re interested in more tax savings, check out these small business tax deductions.
Fill Out Form 5884 Or Form 3800 To Obtain The WOTC
When you are filling out your taxes, you will need to provide forms to the IRS about your employees’ tax credit eligibility.
- Form 5884: This form is a single sheet that allows you to put in the wages you are claiming for an eligible employee and the percentage of that credit. Simply do the calculations and add the numbers together and place the total at the bottom. That total will also go onto Form 3800.
- Form 3800: This form is the general form for all of the business tax credits you are claiming for a single year. The Work Opportunity Tax Credit total will be included on this form along with any other credits you are claiming (like disability access credits or renewable energy credits, for example).
Don’t Forget About Taxes
Once you have gone through the entire process of having your employees certified and claiming the WOTC, the deductions on your actual taxes are fairly simple. If you are a taxable employer, you will claim the WOTC as a general business credit against your income taxes. If you are a tax-exempt employer, you will claim the WOTC against your payroll taxes.
Consider Outsourcing WOTC
As we touched on earlier, many hiring and payroll services can provide automatic help with your taxes and credits and, in particular, with the Work Opportunity Tax Credit. Some companies, including ADP Payroll, have their own web-based screening systems that simplify the process and provide easy access to the needed filing forms come tax time. They often provide analytics and reporting that can help you figure out how your deductions will affect your bottom line. Other services, like Paycom, can automatically help you search for deductions among employees.
In almost every instance, good payroll or accounting software can help save you time and headaches when it comes to taxes, putting everything in one place and providing resources, links, and tax professionals to make sure you are getting the maximum number of deductions.
The Bottom Line On Taking the Work Opportunity Tax Credit
If you are a business that is hiring, particularly if you are hiring part-time labor or looking for seasonal employees, choosing employees who fit into one of the targeted groups that qualify for the Work Opportunity Tax Credit could provide a windfall come tax season. Not only will you be providing a paycheck to someone from a group that has historically run into obstacles when looking for work, but you can also receive as much as $9600 in return on your taxes per employee.
The process for screening and certifying a WOTC eligible employee is relatively straightforward and simple and can be made even easier with the right payroll or accounting software. You may even want to specifically look for employees who are eligible for this credit. Just make sure that you are taking the right steps to get them certified on time, don’t double-up on the wages you claim, and fill out the correct tax forms, and your tax obligations could be significantly less this year.
For other potential tax credits and deductions, make sure you check out some of our other helpful posts!
- The Complete Guide To Payroll Deductions
- Education Tax Deduction: What The New Stimulus Packages Mean For Your Tax Deductions