The Ultimate Guide To The Work Opportunity Tax Credit (WOTC)
If your business employs an individual within the qualified employee groups, you may use the work opportunity tax credit to reduce your payroll tax burden.
The Work Opportunity Tax Credit (WOTC) can save small businesses money by reducing payroll tax liabilities. To qualify for the Work Opportunity Tax Credit and lower your payroll taxes, your company must have hired and paid employees that typically struggle to gain or maintain employment, including veterans, people with disabilities, and more qualified groups.
This guide breaks down everything you need to know about the Work Opportunity Tax Credit, including how to apply and qualify for the WOTC.
Table of Contents
- What Is The Work Opportunity Tax Credit?
- What Types Of Employees Qualify For The Work Opportunity Tax Credit?
- Qualified IV-A Recipient
- Qualified Veteran
- Qualified Ex-Felon
- Designated Community Resident
- Vocational Rehabilitation Referral
- Summer Youth Employee
- Supplemental Nutritional Assistance Program (SNAP) Recipient
- Supplemental Security Income (SSI) Recipient
- Long-Term Family Assistance Recipient
- Qualified Long-Term Unemployment Recipient
- How To Claim The Work Opportunity Tax Credit Program
- The Bottom Line On The Work Opportunity Tax Credit
- Work Opportunity Tax Credit FAQs
- What is the Work Opportunity Tax Credit?
- Can any business qualify for the work opportunity tax credit?
- Who benefits from the work opportunity tax credit?
- What does WOTC mean?
- What is a work opportunity tax credit screening?
- How do I apply for the WOTC credit?
- Should I fill out the Work Opportunity Tax Credit Questionnaire?
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.
Business owners must apply for and receive certification that their new employee/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.
Looking for more payroll-related tax breaks? If your business worked to keep employees on your payroll during COVID-19, you could qualify for the Employee Retention Tax Credit. Work with one of these top ERC service companies to claim your ERC credit.
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, including having worked more than 120 hours. The employer must have had a tax liability for the employee in order to claim the credit. There are ten groups of individuals who fit these criteria according to federal guidelines:
How To Claim The Work Opportunity Tax Credit Program
To claim the Work Opportunity Tax Credit, prospective hires must fill out the first page of IRS Form 8850, which contains the WOTC questionnaire. After you have completed this screening for your employees, the rest of the application process can be handled online through the Department of Labor. Keep reading for a step-by-step breakdown of the WOTC application process.
Fill Out The Work Opportunity Tax Credit Screening Questionnaire
If you are planning on hiring an employee that will make you eligible for the Work Opportunity Tax Credit, you will need to ask them to complete Form 8850, the WOTC screening questionnaire, 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 the employer’s portion of 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 WOTC Qualified Wages & Wage Limits
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 which targeted group your employee falls under, the maximum amount of wages you can claim will vary. Generally, you can claim 40% of allowable wages, up to $6000 (or $2400 total) for each qualified individual.
For qualified veterans, the qualified first-year wage limits range from $6,000 to $24,000 depending on assistance claimed, disability status, discharge date, and unemployment period.
For a long-term SNAP recipient, you can claim 40% of allowable wages up to $10,000 (or $4000 total) and 50% of wages up to $10,000 in the second year of employment.
The limit is just $3,000 for summer youth employees.
And there is no limit on the number of employees you can claim for the credit as long as they are all eligible.
Determine Whether You Can Combine WOTC With Other 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 $6,000 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 WOTC Form 5884 Or Form 3800
When you are filling out your taxes, you will need to provide forms to the IRS about your employees’ tax credit eligibility.
- Form 5884: Form 5884 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: Form 3800 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, 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 for tax support 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 The Work Opportunity Tax Credit
If your business is hiring, choosing employees from one qualifying Work Opportunity Tax Credit targeted group could provide a windfall come tax season. In addition to receiving as much as $9,600 in tax credits per employee, your business will be providing a paycheck to someone from a group that has historically run into employment obstacles.
As the WOTC credit is so beneficial, you may consider specifically seeking 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 30+ Best Small Business Tax Deductions
- Guide To Getting The Employee Retention Tax Credit
- How To Get the Research & Development Tax Credit