It can be difficult for business and company owners to keep track of all the possible tax benefits and credits available to them, especially during the filing rush of the yearly tax season. This struggle is even more significant for owners who don’t rely on the specialized services of expert tax industry professionals like Parachor Consulting. They dedicate themselves to providing businesses with all of the tax benefits they are rightfully entitled to. This article intends to explore the Work Opportunity Tax Credit (WOTC) and its benefits for employers. Please continue reading to learn everything you’ll want to know about the WOTC and what it can do to impact your taxes.
Table of Contents
What to Know About the Basics of the WOTC
In short, the WOTC is a type of federal tax credit that’s available to any employer who hires employees belonging to ten specifically targeted groups that are known to face significant barriers to gaining employment. The WOTC is provided under section 51 of the Internal Revenue Code and is available specifically for wages paid to qualified individuals who start work on or before December 31, 2025.
What Types of Workers Qualify for the Work Opportunity Tax Credit?
The ten categories of workers that qualify for the WOTC include:
- Qualified veterans
- Qualified IV-A recipients
- Long term temporary assistance for needy families (TANF) recipients
- Formerly incarcerated individuals or those previously convicted of a felony in the United States
- Food stamp or Supplemental Nutrition Assistance Program (SNAP) recipients
- Supplemental security income (SSI) recipients
- Designated community residents (DCRs) who live in rural renewal counties or designated empowerment zones
- Qualified long-term unemployment recipients
- Vocational rehabilitation referral recipients
- Summer youth employees living in designated empowerment zones
Each of these ten target groups has specific requirements for employees to be eligible for the WOTC. For example, members of the DCR group must live in a designated empowerment zone, renewal, or enterprise community and be between 18 and 40 years of age. Additionally, they must continue to live in that location after becoming employed. Employees can learn more about the specific requirements for each group of potential WOTC recipients in this chart provided by the Employment and Training Administration by the US DOL.
Which Workers are Not Eligible for the WOTC?
Even if these workers may otherwise make your business eligible to receive the WOTC, you will be unable to acquire the tax credit for hiring:
- Majority owners of your business
- People who were formerly employed by your company (except for summer youth)
- Your relatives or dependants, including children or stepchildren, spouses, parents, siblings or step-siblings, in-laws, cousins, uncles, aunts, nieces, or nephews
What Does the WOTC Do for Employees?
Please note that qualified employees of the WOTC program do not receive extra money from belonging to a special category and meeting WOTC requirements. However, it can significantly increase their attractiveness to prospective employers and raise their chances of being hired. Depending on the job they’re performing, the hours they work, and the target group they belong to, the amount of tax credit an employer can receive by hiring them can usually range from $1,500 to $9,600 per qualified individual. This factor provides employers with a solid incentive to hire individuals belonging to these specific groups, even if they don’t possess the same level of experience or skills as other applicants.
What’s the Maximum Work Opportunity Tax Credit Available?
The amount of WOTC your business is eligible for when hiring employees from any of the targeted groups noted above can vary depending on several factors. However, the typical tax credit amount you can receive is somewhere between 25% to 40% of the employee’s wages earned during their first year of employment with your company. In many cases, employers will be eligible for 25% of their employee’s wages if they worked for at least 120 hours during that first year and 40% of their wages if they worked 400 hours or more during that same period.
A maximum tax credit given is typically around $2,400 per qualified employee within a company. However, up to $24,000 in wages may be considered when determining the WOTC of certain qualified veterans. Employers should remember that they cannot claim WOTC for any employees that their business or company rehires. If a business cannot use all of the WOTC on their current tax return, taxable employers can carry the current year’s unused WOTC back one year and forward 20 years.
How is WOTC Calculated?
Two primary factors actively affect the calculation of the WOTC tax credit. These include:
- The number of hours the new qualified hire works during their first year of employment determines the rate (percentage) applied to their first-year wages. Said wages start accumulating as of the start date of their job with the company or business.
- Each of the ten qualified target groups possesses a first-year wage cap (or maximum wage amount) to which the above percentage may be applied. Employees must work for a minimum of 120 hours in their first year of employment to qualify for and receive the tax credit.
Limitations on the WOTC
Employers should keep in mind that the Work Opportunity Tax Credit is limited based on the total amount of business income tax liability or Social Security tax owed by the business or company. However, a taxable business may apply the credit against its income tax liability, and the normal one-year carry-back and the twenty-year carry-forward rules would still apply. For qualified tax-exempt organizations, the WOTC is limited to the total amount of Social Security tax owed on wages paid to all employees (WOTC-eligible or not) for the period in which the credit is claimed.
Are you an owner of a business that’s currently searching for the expert services of a tax credit solutions provider? Please consider contacting the trusted industry professionals at Parachor Consulting today to learn about how they can help you find the maximum tax benefits available to you.
How to Qualify a Worker for the WOTC
During the employee hiring process or before the employee begins their first day of work, both the employer and applicant must complete two specific forms to be eligible to receive the WOTC. If both documents are not filled out during the hiring process, employers will not be permitted to receive the tax credit.
These forms are required as part of employers’ mandatory WOTC screening process to determine if potential hires are genuinely qualified to be included in their tax credit calculations for the year. Once again, the employee must meet the required WOTC standards regarding the number of hours they work and whether or not they’re a member of a qualified worker category.
IRS Form 8850
The employer and applicant must both complete IRS Form 8850, also known as the IRS pre-screening form. The applicant will fill out the first page when the job offer is made, showing their eligibility for the WOTC. Once hired, the employer will complete the second page of the form, providing information on themselves, their business, and the qualified individual they have officially hired.
DOL Form 9061
Additionally, both the employer and applicant must complete DOL Form 9061. The applicant must complete the form, which the employer will then verify once they have confirmed the identification documents submitted by the applicant as part of the initial hiring process. However, please remember that this form may not be necessary if the applicant has already completed the Conditional Certification DOL Form 9062 instead.
Once the applicant is hired, the employer will be required to submit both forms to either their state workforce or employment agency. They will then determine the worker’s eligibility for the WOTC. Please note that both forms should be submitted no later than the 28th calendar day after the employee begins working. If the worker’s eligibility status is certified for the WOTC credit, the state agency will send a determination letter to the employer. From that point, the employer may apply to the IRS for the tax credits for all qualified employees working for their business.
Additionally, please keep in mind that some states allow employers to submit WOTC applications online. All employers should check with their local employment agency or state workforce to learn more about the submission methods for WOTC applications.
How Does the WOTC Affect Business Taxes?
Businesses and companies that apply for the Work Opportunity Tax Credit are permitted to apply the credit to their income tax liability for the year alongside other tax credits. However, this should occur in a specific order. The tax form used to claim the tax credit depends on the type of business in question. Once again, it should also be noted that the amount of the WOTC is limited by the amount of income tax liability of Social Security tax owed by the business.
Tips for Conducting WOTC Calculations for Your Business
When attempting to calculate the WOTC for your company, employers can make the process easier for themselves by keeping the following three tips in mind:
- Have every eligible employee fill out their WOTC forms as part of their initial onboarding process. Be sure to submit all needed WOTC paperwork to your state’s workforce agency and the IRS for every qualified employee within the first 28 days of their employment.
- Carefully record and keep each WOTC eligible employees’ hours worked and wages, and remember that each employee is required to work for a minimum of 120 hours to be eligible for said credit.
- Be sure to also file both Form 3800 and Form 5884 to claim the tax credit as a general business credit as part of your regular income tax return.
Parachor Consulting offers a web-based application that allows applicants to apply for WOTC digitally and manages the WOTC status and tax credits for each employee throughout the year.
Key Takeaways to Keep in Mind Going Forward
As both employers and WOTC qualified employees continue to work together, there is a range of key factors and takeaways that each would do well to keep in mind going forward. These factors include:
- The Work Opportunity Tax Credit is a specialized program instituted by the IRS and DOL that incentivizes employers to hire individuals belonging to specific target groups and who often face significant barriers when trying to achieve employment in the workforce.
- All employers are required by the government to ensure the eligibility of applicants by receiving a determination of eligibility from their state workforce agency prior to applying for the WOTC.
- The tax credit is based on the category of the worker in question, the total wages paid to them during their first year of employment, and the number of hours they worked during their first year of employment.
- Employers are required to submit an application to the IRS alongside the business’s or owner’s tax returns to receive the WOTC.
The Bottom Line: What Parachor Consulting Can do to Help You This Tax Season
Acquiring the tax credits and benefits that your business or company is eligible for can be a highly important component in ensuring its overall financial success. That said, taxes are hard, and navigating the qualifications and requirements for the credits and benefits you may be entitled to can be a highly complicated process that very few can navigate without significant training or experience in the tax-filing world.
To help ensure that your business is receiving all of the tax benefits and credits it’s rightfully owed, please consider contacting the trusted tax industry professionals at Parachor Consulting to learn about everything we do to help. Also, consider browsing through our expertly written educational tax articles for even more helpful information.