The Work Opportunity Tax Credit is an income tax credit offered to federal employers who hire individuals from particular disadvantaged groups. Under the Small Business Job Protection Act of 1996, the work opportunity tax credit helps businesses lower their tax bills while hiring veterans, long-term unemployed individuals, and others who find gainful employment challenging.
This is going to save an employer’ thousands in tax incentives each year per qualified employee. It’s a win-win for both: the employer gets value in the workforce, and such people get valuable opportunities to join the workforce.
How does WOTC work?
WOTC allows an employer to reduce their federal income tax liability “dollar-for-dollar” by an amount for each qualified employee. For the purposes of measurement, the total value of the credit depends on the number of hours and the wages of the employee in that position for a first-year period.
If the employee completed at least 400 hours of work in the first year, then the employer is entitled to 40% of that employee’s possible first-year wages (subject to the maximum for that group).
The credit is: 25 percent of first-year wages for employees working between 120 and 399 hours.
Most employers are able to get as much as $2,400 for each qualifying hire; however, that credit can be as much as $9,600 for certain veterans and as much as $6,000 for other targeted individuals.
Steps to claim the WOTC
To take advantage of the WOTC, employers must follow a specific process:
1. Pre-screening: Before or on the day of the job offer, the applicant must complete IRS Form 8850 (Pre-Screening Notice).
2. Submit the paperwork: Form 8850 must be sent to the state workforce agency within 28 days of the employee’s start date.
3. Certification: If the state agency certifies that the hire meets eligibility criteria, the employer can claim the credit using IRS Form 5884 when filing their federal taxes.
Tax savings aren’t the whole story
WOTC also encourages qualified hiring practices. For instance, employers are encouraged to think about applicants who might otherwise be ignored: employees with a physical or mental disability, ex-offenders, or recipients of government aid.
Small businesses and even some tax-exempt organizations (with respect to specific hires) are aided by this program. For example, certain nonprofits can claim the credit for hiring qualified veterans and long-term unemployed individuals.
Unused credits can generally be carried back for one year, or forward for as long as 20 years. Hence, the lifetime value provided, even if not fully utilized in the present tax year, can be leveraged long-term.
Who qualifies for the credit?
To be eligible, employees must be newly hired and fall into one of the IRS’s designated target groups, which include:
- Veterans (especially those with service-related disabilities)
- SNAP or TANF recipients
- Ex-felons
- Long-term unemployed individuals
- SSI recipients
- Youth from empowerment zones
- Vocational rehab referrals
The borderline
This is a great tool that can provide businesses with reduced taxes and motivate them to build a diverse workforce. With some careful attention to detail and a little bit of paperwork, employers can reap major benefits while making a real difference.
