Hiring new employees is exciting enough as it is. But you can get added joy from helping someone who may have had a hard time finding work, such as veterans or people trying to get a fresh start after being incarcerated.
And, as it turns out, hiring from certain groups of people can also make you eligible for tax credits, thanks to the U.S. government’s Work Opportunity Tax Credit Program. This program provides financial incentives for employers who hire people that face significant barriers to finding work.
Keep reading to learn all about the tax credit and how you can benefit from it.
What Is The Work Opportunity Tax Credit?
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who hire workers who traditionally have a hard time finding work, like veterans or ex-felons. In other words, it’s a program that helps certain groups of people find work by giving employers an incentive to hire them.
If you hire a qualifying employee and submit the correct documents, you can claim the credit, which can help lower the income taxes you pay for your business. The amount of your tax credit is based on the hired employee’s wages during their first year of employment.
Here’s a closer look at how much businesses can claim with the WOTC.
How Much Can Employers Claim?
Employers can claim up to $2,400 in tax credits through the WOTC program. The actual amount you’ll claim is based on how many hours a certified employee works for you.
In general, WOTC amounts are:
- For employees who worked at least 120 but fewer than 400 hours in the first year: The credit is 25% of $6,000 in wages paid.
- For employees who work 400 or more hours for you in their first year: The maximum tax credit for most eligible workers in this case is $2,400, which is equal to 40% of $6,000 in wages paid.
In some cases, if you hire qualified veterans that fall into an additional WOTC-certified group, you may be able to claim up to $9,600 on your return. The amount you can claim for veterans depends on their qualifying category.
For the most current information on calculating your potential tax benefit, visit your State Workforce Agency (SWA) website.
The U.S. Department of Labor website provides a full list of SWAs.
At this point, you might be wondering, “Do I qualify for the credit?”
Let’s find out.
Who Qualifies for the Work Opportunity Tax Credit?
Any business–regardless of size–that hires an employee from one of the following WOTC target groups may qualify for the WOTC:
- Veterans
- Ex-felons
- Summer youth employees
- Long-term unemployment recipients
- Supplemental Security Income (SSI) recipients
- TANF recipients (Temporary Assistance to Needy Families)
- Designated community residents (DCR) who live in either a government-identified Empowerment Zone (EZ) or Rural Renewal County (RRC)
- People receiving benefits from their state’s Supplemental Nutrition Assistance Program (SNAP) (formerly known as the Food Stamps Program)
You can find full details for each qualifying group on the Internal Revenue Service (IRS) WOTC page.
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Are There Exceptions to the WOTC?
Family members, dependents, and people who may become majority owners of the business may not qualify for the credit, even if they are a member of a target group. The credit does not apply to employees that you’ve rehired.
For instance, let’s say you hired someone who was a qualifying veteran, but you didn’t apply for the WOTC in their first year of work. You can’t terminate their employment and then rehire them to take advantage of the tax credit.
Can All Types of Businesses Apply for the WOTC?
Businesses of all sizes can apply for the credit as long as they’ve hired a qualifying individual. There’s also no limit to the number of employees you can hire.
That being said, participation is not mandatory. You do not need to apply for WOTC certification even if you hire someone from one of the qualified groups.
For many businesses, the tax credit is worth going through the application process. But if you don’t want to fill out the forms, that’s okay too. You just won’t be able to claim the credit.
How to Claim The Work Opportunity Tax Credit as an Employer
The first thing you need to do to obtain the WOTC tax benefit is to get certified by your State Workforce Agency (SWA). This is the organization that reviews your application and confirms whether or not the person you hired qualifies you for the tax credit.
Once you’re certified, you can file for the credit with your business’s annual tax return.
Let’s take a closer look at each of the steps you’ll take to apply for the WOTC.
1. Pre-Screen Your Job Applicant
If you have an applicant that may fall under one of the target groups, you need to pre-screen them. To do so, ask the applicant to fill out and sign the first page of IRS Form 8850. This is the Pre-Screening Notice and Certification Request.
Deadline: The applicant must fill out the form on or before the day they receive a job offer.
2. Complete Form 8850
If your applicant accepts the job, go ahead and fill out page 2 of Form 8850. This is where you provide your business information and the following dates:
- Date that the employee filled out the questionnaire
- Date of job offer
- Hire date
- Employee’s start date
Deadline: 28 days from the new hire’s start date.
3. Complete Your Supporting Document and Send the Application
In addition to sending Form 8850, you need to send one of two Department of Labor (DOL) documents to support your application.
Some applicants may be tentatively pre-certified by a SWA or participating agency. In that case, you’ll submit ETA Form 9062, Conditional Certification Form, along with your Form 8850. To figure out whether or not someone is pre-certified, you can ask them during the job application process.
If your new hire is not pre-certified, you’ll submit ETA Form 9061, Individual Characteristics Form (ICF) instead. Your employee will have to answer additional questions that the SWA will use to determine their qualification for one of the target groups.
Deadline: 28 days from the new hire’s start date.
4. Track Your Employee’s Work Hours
You can only receive a tax credit for qualified employees who have worked at least 120 hours in their first year with you, so keep an accurate record of hours worked. Employees that are a member of a family that receives Temporary Assistance for Needy Families (TANF) need to work a minimum of 400 hours in order for you to receive the tax benefit.
Bonus tip: Using payroll software like Hourly can help track wages and automate time tracking. You can pull accurate timesheets with the click of a button when you apply for the tax credit.
5. Submit Form 5884 To Claim Your Tax Credit
To claim your tax credit, submit IRS Form 5884, the Work Opportunity Credit Form, along with your income tax return. Form 5884 includes the total tax credit calculation for your business, so you only need to submit one form even if you have multiple WOTC-certified employees.
After filing, keep a copy of the form with your tax records in case the IRS audits your business. As a general rule, the IRS can audit a return up to three years after it was submitted, so it’s a good idea to keep these records for at least that long.
Common IRS audit triggers include large business deductions, big cash purchases, and reporting high income on your taxes. That being said, most businesses don’t have to deal with IRS audits, but it’s a good practice to keep copies of tax return documents.
Should I Fill Out the Work Opportunity Tax Credit Questionnaire?
Yes. Job seekers who fall into one of the WOTC target groups should fill out the pre-screening questionnaire, as it could help with finding a job. This is because prospective employers would receive an additional tax benefit for hiring you if you fall into one of the WOTC-certified groups.
Understanding the Work Opportunity Tax Credit
The Work Opportunity Tax Program aims to help certain groups of people find jobs by giving their employers a federal tax credit. Examples of WOTC target groups include veterans, ex-cons, and individuals receiving other forms of government financial assistance.
Employers that hire from WOTC-certified groups receive a tax benefit based on wages paid to qualifying employees during the first year of work. To qualify, you need to complete a pre-screening process and get certified by a State Workforce Agency.
After that, make sure to keep a record of your employee’s total pay and hours worked so you can claim the right amount on your tax return.
