As the tight labor market continues to put upward pressure on wages, many businesses are struggling to attract and retain qualified workers at salaries the company can afford to pay. One often-overlooked tax credit could provide some relief for companies in this situation while also pointing them to a potential source of new employees they might not have considered otherwise.
The Work Opportunity Tax Credit (WOTC) is designed to encourage businesses to hire individuals from certain targeted groups that have traditionally faced employment barriers, such as unemployed or disabled veterans, the long-term unemployed, and recipients of various federal assistance programs. The credit’s maximum amount can range from $2,400 to $9,600 for each new hire, depending on the wages paid, the number of hours worked, and which of the targeted groups the employee belongs to.
For many years, the WOTC was extended each year as part of a package of temporary one-year tax provisions but, in late 2020, as part of its response to the COVID pandemic, Congress voted to make the program less temporary. It is now scheduled to continue through at least the end of 2025.
How the WOTC Works
The IRS and U.S. Department of Labor administer the WOTC program jointly through designated state workforce agencies, such as a state department of labor or workforce development. To claim the credit, a company must first obtain certification from the state workforce agency that the worker qualifies as a member of a targeted group.
To get this certification, the company and the employee must complete Form 8850, “Pre-Screening Notice and Certification Request,” either before or on the same day the job offer is made. The company then must file the form with the state workforce agency within 28 days of the new employee’s start date. In other words, you cannot wait until tax season to start qualifying; the certification request must be submitted promptly.
If the new hire meets the eligibility requirements, the company will receive a certification from the state workforce agency, which it can then use to claim the WOTC as a general business credit against its federal income tax. (Note that the wages used to claim the WOTC cannot be used to qualify for other payroll-based tax credits.)
The WOTC is a nonrefundable credit, so the amount claimed in any given year is limited to the amount of the employer’s tax liability for that year. But any unused credit can be carried forward and applied to future tax bills for up to 20 years.
Qualified Targeted Groups
To qualify for the WOTC, employers must hire employees who are members of any of the following groups:
- Families receiving Temporary Assistance for Needy Families (TANF) benefits
- Supplemental Nutrition Assistance Program (SNAP) recipients who meet certain age and other requirements
- Supplemental Security Income (SSI) recipients who received benefits within the 60 days of their hire date
- Long-term family assistance recipients who meet certain conditions
- Qualified recipients of long-term unemployment benefits
- Residents of designated Urban Empowerment Zones, Enterprise Communities, or Rural Renewal counties
- Qualified veterans (including disabled veterans) who meet certain income and unemployment requirements
- Ex-felons who are hired within a year of their release
- Individuals referred by approved vocational rehabilitation programs who meet certain disability qualifications
- Summer Youth Program employees living in Empowerment Zones
As previously noted, certain age limitations and time restrictions apply to some of the groups. In addition, the WOTC cannot be claimed for hiring dependents or relatives, for rehiring previous employees, or for any employee who does not complete at least 120 hours of work after being hired.
Ordinarily, employers would be prohibited from asking job applicants about family assistance benefits, disabilities, or other WOTC qualifications, but the Equal Employment Opportunity Commission has issued a formal opinion letter stating that employers are not violating anti-discrimination laws by allowing job applicants to voluntarily answer the questions on Form 8850 (https://www.eeoc.gov/laws/guidance/commission-opinion-letter-federal-work-opportunity-tax-credit-form-8850). Some state laws may vary, however, and employers must be careful not to consider these answers in any other employment decisions, such as cutting back hours or laying off an employee later.
Credit Amounts and Qualifications
For qualified individuals who work at least 400 hours in their first year of employment, the available credit is equal to 40 percent of their first $6,000 in wages. Thus, the maximum credit for most qualified new hires is generally $2,400. For certain qualified veterans, however, the first $24,000 in wages can be taken into account, producing a maximum credit of $9,600 per employee.
For employees who work less than 400 hours but at least 120 hours in their first year of employment, the credit is equal to 25 percent of qualified wages. In this way, even temporary or part-time employees can help a business qualify for a credit as long as they belong to one of the targeted groups and meet the other qualification requirements.
Websites for the IRS (https://www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit) and the U.S. Department of Labor (https://www.dol.gov/agencies/eta/wotc) offer more detailed information on the requirements and limitations.
Please reach out to Holbrook & Manter for more information. We would be happy to assist you.