What is the work opportunity tax?
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who invest in hiring Americans from certain target groups who have previously faced barriers to employment.
The goal of this is to act as an incentive for employers to exemplify workplace diversity in return for a maximum tax credit. It is supposed to promote the hiring of American workers of a certain target group while providing a federal tax incentive to employers who hire them. Employers have until December 31, 2025 to file. The amount of the tax credit under the WOTC program depends on the target group the employee belongs to as well as qualified wages paid and hours worked. Taxable employers can carry the current year period’s unused WOTC back one year or forward 20 years.
Where did it come from?
The WOTC was created back in 1996 as part of Section 1201 of the Small Business Job Protection Act of 1996 and has since been updated on multiple occasions. Even back then, employers at for-profit organizations could claim a tax credit against federal tax liabilities for hiring members of certain groups. Tax-exempt employers can claim WOTC against their payroll taxes.
In 2015, The Protecting Americans from Tax Hikes Act (PATH Act) allowed qualified employers to claim WOTC for targeted group employee categories that were apparent before the enactment of the PATH Act as long as the individual began working for them after December 31, 2014 and before January 1, 2020. In the fiscal year of 2021, over 2 million certifications were filed by state workforce agencies. These SWAs received over $18 million in support of the WOTC program.
Workforce programs such as this one were created as a voluntary act for businesses. Therefore, businesses do not need to send a job offer to an individual in one of the target groups. However, businesses are encouraged to invest in American job seekers who have faced barriers to unemployment in order to establish diversity in the workplace.
How do you qualify?
When looking into employer eligibility for the WOTC program, there are a few qualifications businesses must meet. Employers must verify that the new hire was part of the target group in order to claim work opportunity tax credit.
What is the target group for an eligible employee?
- Ex-felons – those who have been previously convicted of a felony who have been released within the last 12 months
- Recipients of state help under title IV of the Social Security Act (SSA)
- Qualified veterans – veterans who have served over 180 days or were discharged sooner because of a service-connected disability
- Summer youth employees between the ages of 16-18 who are employed from no longer than May 1st to September 15th
- Applicants who qualify for supplemental security income (SSI) benefit
- Individuals who are long-term family assistance recipients or require temporary help for needy families (TANF)
- A designated community resident living in empowerment zones or rural renewal counties – empowerment zones are economically distressed communities, eligible to receive tax incentives and grants from the federal government
- Individuals who are part of a supplemental nutrition assistance program under the Food and Nutrition Act of 2008
- A qualified long-term unemployment recipient
- Individuals referred after completing a rehabilitation program
Individuals must have a required certification from a state workforce agency, must be within one of the ten targeted groups, and be in their first year of employment in order to be eligible. Several factors that can prevent an employer from qualifying are if they hire a family member, former employee, or someone who will have a large share in the company. In order to be eligible, employees must work a minimum of 120-400 hours. Within a qualified first-year period for employees who worked between 120-400 hours, credit is 25% of these first-year wages. For employees who worked over 400 hours, 40% of first-year wages can be credited.
If you are interested in creating a diverse workplace by hiring individuals within the specified target groups, there are many resources to help you find qualified candidates such as American Job Centers. Some examples of these can be the Veterans Administration, social services offices, and various vocational rehabilitation centers. Some candidates even have certain certifications that tell potential employees the amount of credit they could earn if they hire this individual.
What should you pay attention to?
After employees are deemed as part of the target group, employers must file for the tax within 28 days of the employee’s start date. Employers can find out if employees are a member of the target group by asking them to fill out a questionnaire upon hire.
To file for WOTC, the (Internal Revenue Service) IRS Form 8850 must be completed, along with several forms from the Department of Labor. IRS Form 8850 acts as a pre-screening notice to make a certification request to the state workforce agency (SWA). DOL requires employers to fill out an Individual Characteristics Form (ICF) and ETA Form 9061 or 9062. The purpose of the forms are to ensure the individuals qualify as one of the targeted groups. All forms can be submitted via email, online, or direct mail.
Both new businesses who do not have much tax credit and larger companies with a large credit portfolio can take advantage of the WOTC. Plus, businesses can apply for more than one credit for the same employee. However, credit is limited to the business’ income tax liability. Credit will not affect the employer’s Social Security tax liability on their tax return. Taxable employers can claim WOTC as a general business credit against their income taxes.
Why should you partner with us when filing for WOTC?
The work opportunity tax credit can confuse those who have not previously filed. Working with us will save you time and effort, and will ensure you file correctly to find out the amount of your business’ income tax liability. We will make sure that all the requirements for the IRS, DOL, and U.S. Employment and Training Administration are met in order to successfully create your WOTC account. Contact us today.