The Work Opportunity Tax Credit (WOTC) is a federal tax credit that can be significant for many employers, but many may not know how it works or can impact their financials. In general, understanding tax credits can make a huge difference in whether you owe money come tax season or get a larger return. Optimizing on these opportunities will depend on your specific understanding of the different programs and how they can impact you, though.
This guide will go into everything you need to know about the Work Opportunity Tax Credit program, including what it is, who qualifies for it, and how your company can get these tax credits.
What is the Work Opportunity Tax Credit? (WOTC)
The Work Opportunity Tax Credit program is a federal tax credit available to employers who hire individuals from a specific targeted group. These groups often include employees who have consistently faced significant barriers to employment. In general, it is based on three factors:
- The category of the workers that are hired
- The wages that are paid to those workers in their first year
- The hours these individuals work
This program has been put into place for individuals who began working or will begin to work after December 31, 2014, and before January 1, 2021. It also has two primary purposes, too: to promote hiring individuals who qualify as a member of a target group and provide a federal tax credit of up to $9,600 to companies that hire these individuals.
How to Qualify for the Work Opportunity Tax Credit
If your business is looking to hire an employee, you first need to figure out if the worker you want to hire fits into one of the protected target groups that qualify you for the Work Opportunity Tax Credit. Employees who may fit these groups include the following:
- Long-term temporary assistance recipients
- Veterans
- SNAP food stamp recipients
- Ex-felons
- Vocational rehabilitation referrals
- Designated community residents living in rural renewal counties or empowerment zones
- Long-term family assistance recipients
- Summer youth employees who are living in empowerment zones
- Supplemental security income recipients
- Qualified long-term unemployment recipients
Additionally, there are also specific qualifications within each of these categories that will determine if an employee qualifies. The Department of Labor provides a summary of the requirements that need to be met.
Employees Not Eligible
Even if you may otherwise be eligible for the Work Opportunity Tax Credit, an employer cannot get the tax credit for hiring a relative or a dependent — such as a child, spouse, parent, uncle, aunt, in-law, other family members — or a majority owner of the business.
How to Claim the Work Opportunity Tax Credit
The first step to obtaining the Work Opportunity Tax Credit is figuring out if the worker you hired qualifies. That is why before the employee begins to work for your business, you need to have them fill out two forms and follow these steps:
Step 1: Screening
You and the applicant need to complete IRS Form 8850, which is the IRS pre-screening form. When the job offer is made, the applicant needs to complete the first page indicating their eligibility. When the applicant is hired, you will complete the second page of the form by providing the company’s details and information on the applicant hired.
Step 2: Forms
You and the applicant will need to complete Form 9061 from the Department of Labor. You will have the applicant complete the form, and as the employer, you will verify the documents. Once hired, you will submit these two forms to your state’s workforce agency for a determination of whether the worker is eligible for the Work Opportunity Tax Credit.
Step 3: Claim the benefits
When the state’s workforce agency indicates that your worker is qualified, then you can claim the tax credit by filling out and submitting IRS Form 5884 with your business tax return. To complete this IRS form, you will need to add up all the wages of the qualified workers, depending on their hours worked and their specific category, and then multiply the amounts by the number of hours worked during the year and the appropriate percentages indicated in the regulations.
Employers can claim around $9,600 per qualified employee hired in tax credits per year under the Work Opportunity Tax Credit program. In addition, there is no set limit to the number of qualified individuals a company can hire in order to claim this tax credit.
Which Wages Are Counted for the WOTC?
Once you hire an employee who makes your company eligible, you now need to determine the amount of wages for the Work Opportunity Tax Credit. Because these wages need to be paid in the first year of employment, your business will need to wait until you have one year’s pay to create an application for the tax credits. You can then include all the payments made to the employee in the year, as long as:
- The business paid the wages.
- The business also paid the Federal Unemployment Tax (FUTA) on these wages.
- The company paid these wages directly to the employee.
Wages that are indirectly paid through your business or subsidized by another party do not count towards the Work Opportunity Tax Credit.
Get Professional Help Claiming the Work Opportunity Tax Credit
Given the numerous benefits of the Work Opportunity Tax Credit, employers need to make sure they consider the program before they make their next hire. Do not be afraid if you still do not understand how to make this program work with you. Instead, get the tax consulting help you need to simplify this process.
Contact Silver Tax Group today to speak with an experienced legal professional about any Work Opportunity Tax Credit questions you might have.
