Work Opportunity Tax Credit basics, tow men shaking hands in job interview
Work Opportunity Tax Credit basics, tow men shaking hands in job interview

Work Opportunity Tax Credit Basics

The Work Opportunity Tax Credit (WOTC) is available to employers that hire individuals from targeted groups that have traditionally faced barriers to employment. For each WOTC-eligible employee hired, you’ll be able to reduce your federal tax liability. The WOTC is one of the most underutilized tax credits available to businesses. Read on to find out if your business is eligible and how you can overcome operational obstacles to capture WOTC credits.

What are the WOTC groups?

WOTC target groups include veterans, ex-felons, food stamp recipients, social security income recipients, vocational rehabilitation referrals, summer youth employees, disconnected youth, long-term family assistance recipients, IV-A recipients, and designated community residents.

How much is the WOTC?

In most cases, the WOTC comes to 40% of the employee’s qualified wages for the first year of employment if they work at least 400 hours that year. If they work at least 120 hours, but fewer than 400 hours, the credit is 25%. The credit is limited to the first $6,000 of income, although there are exceptions. The wages subject to the credit cannot be claimed as a deduction on your tax return.

Example WOTC scenarios

You hire Mr. Smith for $10 an hour. Mr. Smith is an ex-felon who worked for you for 700 hours this year (or 17.5 weeks). At the end of the year, you have paid him $7,000 in gross income. The work opportunity credit comes to $2,400 (first $6,000 in wages x 40%). If, however, you hire Mr. Smith for $10 an hour and he works 300 hours (seven and a half weeks), you will have paid him $3,000 in gross wages at the end of the year. In that case, the total credit is $750 ($3,000 x 25% since he worked more than 120 hours, but fewer than 400).

Exceptions:

  • For qualified veterans, the wage limit is $12,000. This means that your potential credit could be as much as $4,800 per veteran.
  • For summer youth employees, the credit is 40% of wages paid during any 90-day period between May 1 and September 15, up to a maximum of $3,000 per employee.
  • Wages do not include amounts paid under federally funded on-the-job training programs, Social Security work supplement payments under section 482(e) of the Social Security Act, or wages paid to employees filling strike replacement positions.

Are there any drawbacks to the credit?

Except in the case of a C-Corporation, the WOTC is taken on the personal income tax return of the owners of the company. In other words, even if you hire someone to work for the first half of the year, you won’t be able to apply the credit until the following year when you file your corporate and personal income tax returns. The credit also is not refundable. If your total tax liability after other credits and deductions comes to zero for the year, you cannot take the WOTC for that year. You do have the option to carry it forward up to twenty years, or carry it back to the previous year.

You must also reduce your deduction for wages by the total amount of the credit. If you pay an employee $20,000 for the year and take the maximum credit of $2,400 (40% x the first $6,000 in wages), you can only deduct $17,600 in wages for that individual on your business return. If you are the single owner of an S-Corp and in the top tax bracket, that would reduce your effective tax savings by $840 ($2,400 x 35% tax bracket).

How to claim the Work Opportunity Tax Credit

To qualify for the WOTC, you must fill out Form 8850 for the IRS (which has a portion for the employer and employee to fill out) and file for certification with your local agencies. In Florida, Form 8850 and Florida Form ETA-9061 must be completed and mailed to the Agency for Workforce Innovation in Tallahassee no later than 28 days after the employee’s start date.

To claim the WOTC, you’ll also need to screen applicants to determine WOTC program eligibility, submit the right paperwork, and file for the tax credit. Remember to keep track of employee hours and maintain records.

  1. Find WOTC-eligible candidates by contacting your local unemployment office or the state workforce agency (SWA).
  2. The IRS’ recent WOTC guidance requires both the employer and job applicant to complete a Form 8850: Pre-Screening Notice and Certification Request for the Work Opportunity Credit for pre-screening purposes.
  3. Sign and submit the completed Form 8850 plus either ETA-9061 or ETA-9062 to the SWA within 28 calendar days of the eligible new employee’s start date.
  4. Correctly track employee hours and qualified wages paid.
  5. Use IRS Form 5884 to claim the WOTC when filing your annual tax returns.
  6. Be sure to make copies of and file all the forms and supporting documents.

Put the WOTC to work for your business

When you hire a professional to help you claim the WOTC (and other credits for which your business is eligible), you can minimize the effort involved and make sure that you’re following the correct procedure. Contact us to learn how you can make the most of this opportunity to offset your federal tax liabilities.

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