To maximize your hiring budget, consider taking advantage of the Work Opportunity Tax Credit (WOTC). This credit is available to employers who hire individuals from specific "targeted groups" who have faced significant obstacles in finding employment. Not only does this program benefit employers, but it also positively impacts the lives of those who may have otherwise faced employment challenges.
What is the Work Opportunity Tax Credit?
WOTC is a federal tax credit available to employers for hiring individuals from certain target groups who have consistently faced significant barriers to employment.
How much is the Work Opportunity Tax Credit?
While most target groups have a maximum credit of $2,400 per eligible new hire, some exceptions exist. For instance, hiring qualified veterans could result in a credit of up to $9,600 per eligible new hire. Businesses can quickly estimate their annual tax credit using a WOTC calculator.
Who qualifies for the Work Opportunity Tax Credit?
Individuals in the groups listed below often face barriers to employment and may be considered WOTC-qualified employees:
- TANF recipients
- SNAP recipients
- SSI recipients
- Long-term unemployment recipient
- Designated community and empowerment zone residents
- Vocational rehabilitation referral
- Qualified summer youth
Why should employers take the Work Opportunity Tax Credit?
WOTC helps employers by incentivizing them to think outside the box when finding potential employees and creating opportunities for those who may have difficulty entering the workforce. In addition, by giving employers a financial incentive to hire from these target groups, WOTC helps employers and employees. Employers get a credit against their payroll taxes, while qualified employees gain access to jobs that may otherwise have been unavailable. Ultimately, WOTC allows businesses to positively impact their community while seeing financial benefits in return.
When can an employer receive the Work Opportunity Tax Credit?
A business may claim WOTC for wages paid to eligible individuals during their first year of employment if they worked at least 120 hours for the employer during that first year. The credit is calculated as follows:
- 25% of the wages paid to an employee who worked between 120 and 400 hours; or
- 40% for an employee who worked more than 400 hours.
Employers demonstrating that they have hired a qualified individual from one of these target groups are eligible for an income tax credit against their business’s payroll taxes.
How do employers claim the Work Opportunity Tax Credit?
Before claiming WOTC, employers must confirm that the individual is a targeted group member. In addition, the employer should submit Form 8850 with the state workforce agency within 28 days of the hire date. Other documentation may be needed when it comes to tax filing. All businesses receiving the credit (taxable and tax-exempt employers) must provide all required documentation to the appropriate agencies.
Are there Limitations on the Work Opportunity Tax Credit?
The credit is limited to the amount of the business income tax liability or social security tax owed. A taxable business may apply for the credit against its business income tax liability—the normal carry-back and carry-forward rules apply. The Instructions for Form 3800, General Business Credit, provide more details. For qualified tax-exempt organizations, the credit is limited to the amount of employer social security tax owed on wages paid to all employees for the period the credit is claimed.
The Work Opportunity Tax Credit is an excellent way for employers to benefit from hiring individuals from targeted groups and help create opportunities for those with difficulty entering the workforce. Additionally, outsourcing your company's WOTC program could make it easier for you to take advantage of this tax incentive while leaving all the details to qualified professionalsThis information is distributed with the understanding that CBIZ is not rendering legal, accounting, or other professional advice. The reader is advised to contact a professional before taking action based on this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.