What Is WOTC? An Employer’s Guide To The Work Opportunity Tax Credit
If you’re like many employers, the amount you have to pay in taxes is affecting your ability to invest in areas that will drive your future growth like technology and people. To lessen the impact on your organization, you may be looking for ways to reduce your tax exposure. One way is to take advantage of a little-known program called the Work Opportunity Tax Credit (WOTC). Want to know if you qualify? Let’s find out.
In this article, we’ll discuss what the WOTC is, how the program works, the benefits, and what you need to do to qualify for it. After reading this, you’ll understand what you need to do to claim the Work Opportunity Tax Credit to lower your tax obligation going forward.
What is WOTC?
The Work Opportunity Tax Credit (WOTC) is a tax credit jointly administered by the IRS and Department of Labor (DOL). It’s available for wages paid to certain individuals who begin work on or before December 31, 2025, who are certified by a designated local agency (sometimes referred to as a state workforce agency) as being a member of one of 10 WOTC target groups. These categories of workers have had been identified as having significant barriers to employment and include:
- Qualified veterans
- Qualified IV-A recipients of state programs for needy families with children
- TANF recipients
- SNAP (food stamp) recipients
- Designated community residents
- Vocational rehabilitations referral
- Supplemental security income (SSI) recipients
- Summer youth employees in empowerment zones
- Qualified long-term unemployment recipients
The DOL provides a chart that outlines additional detail on the eligibility criteria.
While the WOTC was originally set to end in 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended it through the end of 2025.
What are the benefits of the Work Opportunity Tax Credit program?
The primary benefit of the WOTC program for most businesses is the obvious tax savings. It’s important to note that there is no limit to the number of eligible employees you can hire nor a cap on the amount of credits you can claim. That means by targeting specific prospective employees, you can significantly reduce your federal tax burden.
Another advantage of the WOTC program is its potential impact on your organization's culture. By hiring workers from the WOTC targeted groups, you’ll create a more inclusive workplace that showcases you're an employer who promotes diversity, equality and opportunity, which can help attract and retain top talent for your company.
How does the WOTC program work?
In order to claim the tax credit, you must first qualify a worker under the WOTC program. To do this, you and the job applicant have to complete two forms that capture information needed for a state workforce agency to make a determination about whether an applicant is a member of a targeted group for purposes of qualifying for the WOTC. These forms are:
- IRS Form 8850: Form 8850 is essentially a pre-screening form. Before or on the day you make an offer of employment, both you and your prospective employee have sections to complete: the employee fills out the first page about their eligibility and you complete the second page.
- DOL Form 9061: This form, called the Individual Characteristics Form, is used in conjunction with Form 8850 to gather specific information needed to request certification. The applicant completes this form but you’ll need to verify the identification documents they submit. In some cases, an applicant may already have a completed Conditional Certification DOL Form 9062 if they have been pre-screened by a state workforce agency that you can use in place of Form 9061.
Once these are complete and the employee is hired, you’ll submit the forms to your state’s workforce or employment agency. The forms must be received by the 28th day after the employee starts work. From these forms, the state agency will make a determination about the worker’s eligibility for the credit and notify you.
How is the WOTC calculated?
Generally speaking, the Work Opportunity Tax Credit is equal to 40% of up to $6,000 of wages paid to an individual who:
- is in their first year of employment;
- is certified as being a member of a targeted group; and
- performs at least 400 hours of services for that employer.
As a result, the maximum tax credit is generally $2,400.
If an employee works less than 400 hours, you can still claim the credit. A 25% rate applies to wages for individuals who perform fewer than 400 but at least 120 hours of service.
It’s important to note that there is a different maximum credit calculation for qualified veterans that can drive further savings. Specifically, up to $24,000 in wages may be taken into account for determining the WOTC for certain veterans with a service-related disability, resulting in a maximum credit of $9,600.
How do I claim the Work Opportunity Tax Credit?
When your state agency determines that a worker is eligible, you’ll get a letter of certification. Once you’re notified, taxable employers will complete Form 5884 Work Opportunity Credit) while tax-exempt organizations hiring a qualified veteran will or use Form 5884-C. When completing the forms, you’ll total all the wages of your qualified employees and multiply the amounts by the number of hours they worked during the year and the correct percentage, as we just outlined.
You’ll also need to include the amounts from Form 5884 and include them on Form 3800 to claim the credit against your income tax. Both forms should then be filed with the IRS with your annual tax return.
Be sure to keep copies of the forms and supporting documents submitted to your state workforce agency and track qualified employee hours in the event of an IRS audit of the credits claimed.
How to Best Leverage the WOTC to Save on Taxes
With the costs of running a business continuing to rise, it’s no wonder you’re looking for ways to save. As you can see, a great way to reduce your expenditures is to take advantage of tax credits like the WOTC that can reduce your liability. To maximize the benefits of the WOTC, however, it’s important to make it part of your hiring and recruiting strategy so that you’re prioritizing the targeted groups in your efforts and attracting candidates who will qualify.
If your organization doesn’t have a strategy or could use additional guidance, a good first step is to understand what’s involved in creating a hiring process for your business. While having a process can help you meet your recruiting goals, such as reaching WOTC targeted groups, hiring can still be difficult and time consuming. For these reasons, many businesses opt to outsource their recruiting efforts. If this sounds like it could be the best solution for your company, learn more about what makes a good recruiter.
in Payroll , Tax , Tax Credits