You may be leaving money on the table if your company doesn't participate in the Work Opportunity Tax Credit Program, or WOTC, as it is commonly known.
Not only does this program help provide jobs to those facing barriers to employment, but it also incentivizes employers to hire them. It's a win-win, but only if you know how to take advantage of it.
What is the Work Opportunity Tax Credit Program (WOTC)?
The WOTC is a federal tax credit that is available to employers who hire individuals from specific target groups that are considered to face barriers to employment. The program is designed to encourage employers to hire and retain workers who may face significant obstacles to employment, such as long-term unemployment, veterans with service-related disabilities, ex-felons, and individuals receiving certain types of government assistance.
The amount of the tax credit can range from $1,200 to $9,600 per eligible employee, depending on the target group to which they belong and the number of hours worked. To qualify for the credit, employers must obtain certification from the state workforce agency that the individual they are hiring is a member of one of the targeted groups.
The Small Business Job Protection Act of 1996 created the WOTC program, which has been extended and modified several times since then. The program is intended to help reduce the federal tax burden on employers and promote employment opportunities for individuals who face barriers to finding and keeping a job.
What Are the Eligibility Requirements for the WOTC?
To be eligible for WOTC, an individual must be a member of a specific targeted group recognized by the program. These targeted groups include:
- Temporary Assistance for Needy Families (TANF) recipients: Individuals who have received TANF benefits for nine months during the previous 18 months.
- Veterans: Veterans who have been unemployed for at least four weeks in the past year or who have a service-connected disability and have been unemployed for at least six months in the past year.
- Long-term unemployed individuals: Individuals who have been unemployed for at least 27 consecutive weeks and have received unemployment benefits during that time.
- Ex-felons: Individuals who have been convicted of a felony and have completed or been released from their sentence within the past year.
- Designated community residents: Individuals between the ages of 18 and 39 who live in an empowerment zone, enterprise community, or renewal community.
- Vocational rehabilitation referrals: Individuals who have a physical or mental disability and have been referred to an employer by a vocational rehabilitation agency.
- Supplemental Nutrition Assistance Program (SNAP) recipients: Individuals who have received SNAP benefits for at least 6 of the previous 12 months.
- Summer youth employees: Individuals between the ages of 16 and 17 who are employed for the summer months.
Employers must obtain certification from the state workforce agency that the individual they are hiring is a member of one of these targeted groups in order to claim the tax credit. The amount of the credit varies depending on the targeted group and the number of hours worked.
The WOTC Process
The process of the WOTC program involves several steps, which are as follows:
1. Identify eligible employees: Employers must identify employees who belong to one of the eligible targeted groups. To do so, they may ask employees to fill out a form, such as IRS Form 8850, on or before the day the employee is offered employment.
2. Complete and submit WOTC application: Employers must complete the necessary paperwork to apply for the tax credit, including IRS Form 8850 and ETA Form 9061 or 9062. These forms must be submitted to the appropriate state workforce agency within 28 days of the employee's start date.
3. Receive certification: The state workforce agency will review the application and determine if the employee is eligible for the WOTC. If the employee meets the eligibility criteria, the agency will issue certification to the employer.
4. Claim tax credit: Employers can claim the tax credit on their federal income tax return. The amount of the credit varies depending on the targeted group and the number of hours worked by the eligible employee.
5. Monitor retention: Employers must track the retention of WOTC-eligible employees to ensure that they meet the minimum retention requirements. If an employee leaves before the required retention period has passed, the employer may need to repay some or all of the tax credit claimed.
It is important to note that the government does not intend for employers to seek out potential hires based on their WOTC eligibility. Instead, employers are supposed to begin the screening process after an offer of employment has already been made and accepted.
Like all government programs, there are also certain deadlines and requirements that employers must follow to claim the tax credit. Ideally, a company’s HR department or contracted PEO has a process in place to identify WOTC candidates as a part of their onboarding. Once a candidate is identified, the employer/PEO can go about securing the required paperwork to prove the credit at tax time.
Employers should consult with their tax advisor or the state workforce agency for detailed information on the program and its requirements.
How Does the WOTC Interact with Other Tax Credits and Deductions?
The WOTC can interact with other tax credits and deductions in several ways.
- Payroll tax deductions: Employers can deduct the wages and salaries paid to employees from their taxable income, reducing their overall tax liability. The WOTC is a tax credit, not a deduction, so employers can claim both the WOTC and payroll tax deductions for eligible employees.
- Research and development tax credit: The research and development tax credit is another tax credit that businesses can claim. Employers can claim both the WOTC and the research and development tax credit as long as the employee for whom the WOTC is claimed is not involved in the research and development activities.
- Federal Empowerment Zone (EZ) tax incentives: The federal government provides tax incentives to businesses located in designated Empowerment Zones (EZs). Employers can claim the WOTC in addition to these incentives, but they must claim the WOTC first, as it may affect the amount of the other tax incentives.
- State tax credits: Many states offer their own tax credits for hiring workers from targeted groups. Employers can claim both the state tax credit and the WOTC, but they should check the specific requirements of each program to ensure compliance.
- Other federal tax credits: The WOTC can also interact with other federal tax credits, such as the Disabled Access Credit or the Small Business Health Care Tax Credit. Employers should consult with their tax advisor to understand how the WOTC interacts with other tax credits and deductions and how to maximize their tax benefits.
Overall, the WOTC can be a valuable tax credit for businesses that hire workers from targeted groups. Employers can use it in conjunction with other tax incentives to further reduce a business's tax liability.
Common Mistakes Employers Make When Claiming the WOTC
Employers may make several common mistakes when claiming the WOTC. Here are some examples:
1. Missing or incomplete forms: Employers must submit all required paperwork, including IRS Form 8850 and ETA Form 9061 or 9062, to the state workforce agency within 28 days of the eligible employee's start date. Missing or incomplete forms can result in a delay or denial of the tax credit.
2. Failing to meet eligibility requirements: Employers must ensure that the employee meets the eligibility criteria for one of the targeted groups recognized by the WOTC program. For example, the employee must have worked a minimum number of hours and must not have been employed by the same employer in the past year.
3. Not retaining eligible employees: To claim the WOTC, employers must retain the eligible employee for a certain period of time, depending on the targeted group. Failing to meet the retention requirements may result in a reduction or denial of the tax credit.
4. Incorrectly calculating the tax credit: The tax credit amount varies depending on the targeted group and the number of hours worked by the eligible employee. Employers must calculate the credit correctly to avoid over- or under-claiming the credit.
5. Filing the tax credit claim too late: Employers must claim the tax credit on their federal income tax return for the year in which the eligible employee was hired. Failing to claim the credit on time can result in a loss of the credit.
6. Not keeping accurate records: Employers must keep accurate records of the eligible employee's hours worked and retention period. Failing to do so can make it difficult to calculate the tax credit and may result in a loss of the credit.
Overall, it is essential for employers to carefully review the WOTC program requirements and follow the necessary steps to claim the tax credit. Employers should also keep accurate records and consult with a tax professional if they have any questions about the program or their eligibility.
The WOTC program can be a valuable tool for employers who hire individuals from targeted groups. While the process of claiming the credit can be complex and requires careful attention to detail, the potential benefits to employers can be significant. By hiring eligible employees and claiming the WOTC, employers can not only save on their tax liability but also contribute to a more diverse and inclusive workforce. Employers should carefully evaluate the program and seek the advice of a tax professional to determine whether the WOTC can provide a meaningful benefit to your business.