The Work Opportunity Tax Credit (WOTC) is a valuable tax incentive that encourages employers to hire individuals from certain target groups who face significant barriers to employment. By taking advantage of the WOTC, employers can reduce their federal income tax liability, thereby lowering the overall cost of doing business. Here’s a guide on how employers can leverage this credit effectively.
1. Understand the Target Groups
To qualify for the WOTC, an employer must hire individuals from one of the following target groups.
- Veterans
- TANF (Temporary Assistance for Needy Families) recipients
- SNAP (Supplemental Nutrition Assistance Program) recipients
- Designated community residents living in Empowerment Zones or Rural Renewal Counties
- Vocational rehabilitation referrals
- Ex-felons
- Supplemental Security Income (SSI) recipients
- Long-term unemployed individuals
2. Pre-screen Potential Employees
Before making a job offer, pre-screen applicants to determine if they belong to a WOTC target group. This can be done using IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit).
3. Complete Necessary Forms
After pre-screening, complete and submit the following forms to the appropriate state workforce agency within 28 days of the employee’s start date.
- IRS Form 8850: Pre-Screening Notice and Certification Request for the Work Opportunity Credit.
- ETA Form 9061: Individual Characteristics Form or ETA Form 9062 (Conditional Certification Form), if applicable.
4. Certification Process
Please wait for the state workforce agency to process the forms and issue a certification verifying that the hired individual belongs to a WOTC target group.
5. Calculate the Tax Credit
The amount of the WOTC varies based on the target group, the employee’s wages, and the number of hours worked.
- Maximum Credit: Ranges from $2,400 to $9,600 per employee.
- Credit Calculation: Generally, 25% of first-year wages up to $6,000 (if the employee works at least 120 hours) or 40% of first-year wages up to $6,000 (if the employee works at least 400 hours).
6. Claim the Credit on Your Tax Return
To claim the WOTC, report the qualified wages and the credit amount on your federal income tax return using.
- IRS Form 5884: Work Opportunity Credit.
- IRS Form 3800: General Business Credit.
7. Maintain Proper Records
Keep detailed records to substantiate your WOTC claims, including.
- Certification documents received from the state workforce agency.
- Proof of the employee’s qualifications.
- Payroll records and other documents showing wages paid to the employee.
8. Renew Your Efforts Annually
The WOTC program requires annual renewal by Congress. Stay updated on legislative changes to ensure continued eligibility and compliance.
By following these steps, employers can effectively reduce their federal income tax liability through the Work Opportunity Tax Credit. This not only decreases the cost of doing business but also promotes the hiring of individuals who face barriers to employment, fostering a more inclusive workforce.
For more detailed guidance and personalized advice, visit TaxCreditGroup.com or consult one of our tax professionals.