The Work Opportunity Tax Credit (WOTC) program is a federal tax credit that employers can use when they hire people from specific target demographics, such as disabled individuals. In the past, these workers have experienced barriers to employment. However, there are certain rules that employers must follow to access these credits. If you want an overview of the program or learn whether your business qualifies, here is everything employers need to understand about the Work Opportunity Tax Credit.
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Table of Contents
Work Opportunity Tax Credit Basics
Unfortunately, some employees have faced challenges and barriers to their employment. Some businesses might pass them over for a promotion, fail to hire them, or even terminate their job based on a disability. The WOTC looks to help ease some of the issues faced by these employees by offering tax credits to employers. Many businesses qualify for these tax credits but fail to claim them for their employees. Most of the credits are based on a specific category of workers, their wages in the first work year, and their work hours.
First, employers must see whether their new hires are part of a targeted group, which can be challenging. Some employees fear disclosing their disability status since they have faced problems in the past, leading employers to miss out on these valuable credits. With a robust onboarding process and inclusive work environment, employers can put their new hires at ease so they can find out whether they are eligible for these tax credits.
It is important to note that these tax credits are provided to employers, not employees. Any business owner who is eligible to receive a Work Opportunity Tax Credit will do so for business purposes. Any employees hired in the eligible category cannot claim the tax credit. Why would an employee disclose information about their status or disability? This program is more than a tax credit for businesses. It opens the doors of opportunity for workers who may have experienced discrimination in the past. The WOTC program helps to incentivize diversity and improves access to jobs for employees throughout the United States.
Workers Who Qualify for WOTC
When hiring new employees, a business must establish whether the new hire fits into a specific group for the Work Opportunity Tax Credit. Workers who qualify for these tax credits include:
- Qualified veterans: Most of these disabled veterans are entitled to compensation for a service-related tax credit if it has not more than a year after being released from Active Duty or discharged from the service.
- Qualified IV-A: This groups recipients of state programs for needy families with children: Individuals must be a member of a state assistance plan under the Social Security Act. The employee must have received that assistance nine months before the hire date.
- TANF Recipients: These individuals have received long-term temporary assistance.
- SNAP (food stamp) recipients: Qualified individuals must be at least 18 years and under 40. Plus, they must have received SNAP benefits for at least three months.
- Designated community residents. These individuals live in empowerment zones, enterprise communities, or rural renewal counties. Along with that, the person must continue to reside at those locations after they have been hired.
- Vocational rehabilitation referral: These individuals have mental or physical disabilities and have been referred to the employer by qualified programs, such as the Rehabilitation Act of 1973, Ticket to Work program, or a Department of Veteran Affairs program
- Ex-felons: A qualified ex-felon must be hired within a year of being released from prison for or have been convicted of a felony.
- Supplemental security income (SSI) recipients: For a person to be deemed a “qualified SSI recipient,” they must receive SSI benefits within 60 days of employment.
- Summer youth employee: These individuals must currently reside in empowerment zones, renewal counties, or enterprise communities. Plus, the person must be at least 16 years old at the time of hire and have been employed between May 1 and September 15 of that year.
- Qualified long-term unemployment recipients: These workers have been unemployed for not less than 27 consecutive weeks, and they have received unemployment consumption during that unemployed period.
With that brief overview, businesses can determine whether their new hires qualify for the WOTC program. The Work Opportunity Tax Credit Eligibility Chart includes more insights into the qualification of specific targeted groups. Each target group has certain requirements that the individual must meet for the business to claim a tax credit. If those eligibility requirements are not met, employers cannot claim any credits.
Are Some Workers Not Eligible?
While there is a large group of qualified workers, not everyone will meet these requirements. Employers cannot get a tax credit for hiring:
- Any dependants or relatives, such as children, step-children, parents, spouses, siblings, step-siblings, nieces, nephews, cousins, uncles, aunts, or in-laws
- Any majority owners in the company
- Individuals who are formally employed by the business, except those in summer youth programs
How To Qualify a Worker
During the initial hiring process, or the day the applicant starts to work, the applicant and employer are required to complete two forms for the credits. If these forms are filled out, then the business cannot claim the tax credit. The employers and applicants need to complete IRS Form 8850, which is called the IRS pre-screening form. Once there is an offer of employment, an applicant will complete the first page to show they are eligible for employment. When an applicant is hired, the employer will complete the second page, providing information about the applicant and the business.
There are a couple of forms to fill out to qualify a worker for WOTC. The employer and applicant must also complete the Department of Labor’s Form 9061. With that form, the employer must verify all of the identification documents from the applicants. In some cases, the applicants may have filled out the Conditional Certification DOL Form 9062 in place of Form 9061.
After an individual is hired, the employer must submit Forms 8850 and 9061 to the state’s employment or workforce agency. At this stage, the agency will determine whether the worker is eligible for a WOTC credit. There is a timeline for the documents. The employer must submit all forms no later than 28 days after the person has been hired.
While some states require the forms to be mailed in, most states have created online portals for a more straightforward process. Every state is different, with various submittal requirements. Always check with your state to learn how to submit the WOTC applications. The WOTC screening process allows employers to determine if the potential hires qualify for these tax credits. The employees need to meet requirements based on their work hours and whether they are a part of a qualifying category. Pre-screening forms will help determine eligibility for state and federal tax credits.
After the state has certified the worker’s eligibility, the employers will receive a determination letter. Once the employers review the determination letter, then they can apply to the IRS for Work Opportunity Tax Credits for that worker.
Wages Counted for the Tax Credit
Once the individual has been hired, the employers will need to determine the amount of wages for the WOTC. These credits are based on wages paid during the first year of employment. The employees must also work a certain number of hours: at least 120 to qualify for the tax credit. Often, an employer will have to wait until the employee has worked those 120 hours before they can file paperwork for the WOTC.
The employer can include all payments made to the individual in the first year. The business must have paid federal unemployment tax on the employee’s wages. Additionally, the employer must have paid the wages directly from the company. If another party or subsidy has indirectly paid these wages, then they do not count for the WOTC.
Businesses can claim a tax credit of 25% of the wages when a qualified employee works at least 120 hours for the first year, but they can claim 40% if the employee works over 400 hours. For example, if the employees worked 200 hours during the first year of employment and earned $20,000, then the employers could be eligible for up to $5,000 in tax credits. The maximum tax credit that a business can claim is 40% of the employee’s wages.
Keep in mind that the employee wages used to calculate the WOTC eligibility cannot be claimed for other types of employee-based tax credits, such as the Employer Paid Family and Medical Leave credits, Employee Retention credits, disaster retention credits, or Paycheck Protection Program loans. The employer can only use these wages to determine eligibility in the Work Opportunity Tax Credit program.
Applying for the Work Opportunity Tax Credit
After the individual is hired and the employer has received the documentation that the worker qualifies for a credit, then the business can claim a tax credit by completing specific forms and submitting them to the approved agency. These forms can include:
- IRS Form 5884 for partnerships, estates, S corporations, cooperatives, and trusts. This form is a single page that allows the employer to put in the wages from the eligible employee, along with the percentage of the credit. All employers have to do is make the corset calculation and place the total at the bottom of the page. That total is also required for Form 3800.
- IRS Form 3800, known as the General Business Credit, for all other taxpayers and business owners. These forms document all the business’s tax credits for the year. The Work Opportunity Tax Credit can be combined with other credits, including renewable energy credit or disability access credits, but must be listed on the form.
With these forms, the employers will need to add all the qualified workers’ wages and the number of hours worked. After that, those amounts must be supplied by the number of hours worked during the previous year. These forms must also be added to the employer’s tax return and can be used to calculate individual or business tax liability. Employers and businesses must be diligent in keeping track of all the hours and documents regarding their employees. Maintaining accurate records is crucial so an employer can take advantage of those vital tax credits.
Work Opportunity Tax Credits and Business Taxes
Any business may apply for these tax credits to reduce its annual income tax liability. The employer can use WOTC with other types of tax credits and incentives. However, employers may need to fill out several forms to claim these credits. For pass-through businesses, the income and loss of the business are “passed through” the owners, and the employer must file the WOTC tax credits on Form 1040 or 1040/SR. Remember that the amount of the WOTC credit is limited to the total business income tax liability. In some cases, it can also reduce the amount of Social Security tax owed to the IRS.
Work Opportunity Tax Credits Help Employees
While individuals who are hired under the WOTC program will not see any extra money in their paychecks, the program helps employers understand the benefits of hiring these workers. Without the credits, some employers would pass over these workers in favor of others. With the tax credit amount ranging from $1,500 to $9,600 for each qualified worker, employers now have a reason to hire someone who might not have the experience or skills as other applicants. However, the most significant benefit is to provide more opportunities to those workers who may face employment and hiring discrimination in the past.
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