Everything You Need to Know About the Work Opportunity Tax Credit

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August 8, 2022

If you are a business owner, you know that tax planning is an integral part of the business. Every decision you make has its tax advantages or disadvantages. You already know how higher salaries and extra benefits help your employees but directly impact on your bottom line. However, did you know that you may be able to offset some of your business costs with a federal tax credit known as the Work Opportunity Tax Credit? If you are unfamiliar with this tax credit, now is a great opportunity to find out if you are eligible and how it can help your business.  

 Each year, employers claim over $1 billion in tax credit under the Work Opportunity Tax Credit, also known as the WOTC. This is a tax incentive for employers to hire certain hard-to-place job seekers. The goal of this incentive is to help individuals become economically self-sufficient and reward employers who give them employment opportunities.  

 Our Tax Experts Can Help  

 It’s a little complicated, so seeking help from a company that provides professional tax preparation services is a smart business decision. The expert team at Waters Hardy can assist you with all accounting services, including tax prep, related to the WOTC. Understanding all the tax advantages available to you can save you money, which is always a good business move. 

 What is the Work Opportunity Tax Credit? 

 The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who hire members of certain targeted groups. Furthermore, it is primarily aimed at those who have consistently faced employment obstacles. This is a voluntary program and employers are not obligated to recruit WOTC eligible employees. 

 The central idea of this hiring incentive is that the WOTC helps break the cycle affecting targeted individuals. This is targeted towards individuals who often find that a lack of job experience prevents them from getting hired in the first place. The jobs do not have to be permanent, as long as they provide the desired effect of offering work experience. 

 The program was set to end in 2020, but it’s now extended through 2025. There is no limit to the number of employees an employer can hire to qualify for the WOTC.  

Who is Eligible for the Work Opportunity Tax Credit? 

  1. Qualified recipients of aid to families with dependent children or a successor program that received Temporary Assistance for Needy Families (TANF) 
  2. Qualified veterans  
  3. Qualified ex-felon 
  4. Designated community resident  
  5. Vocational rehabilitation referral  
  6. Summer youth employee 
  7. Supplemental nutrition assistance program (SNAP) recipient  
  8. Supplemental security income (SSI) recipient  
  9. Long-term family assistance recipient  
  10. Qualified long-term unemployment recipient  

*Employers CAN’T claim the WOTC for: 

  • Relatives 
  • Former Employees 
  • Undocumented aliens 

How is the Work Opportunity Tax Credit Calculated? 

 The WOTC program reduces the employer’s wage deduction dollar-for-dollar. The tax credit available to businesses varies depending on the WOTC group. This includes a person’s salary and hours worked during their first year of employment.  

 In general, the WOTC is calculated as 40% of first-year eligible wages, up to a maximum of $6,000 per employee. If the employee completed at least 120 hours but less than 400 hours of service for the employer, the WOTC is 25% of first-year wages.  

 There is also a maximum tax credit that can be earned in the case of qualified veterans and summer youth employees. In addition, some wages do not qualify, and there are some exceptions for tax exempt organizations. A professional tax preparation team can clarify these special circumstances. 

 How Can Employers Claim the Work Opportunity Tax Credit? 

Search for employees  

  • To find eligible applicants, employers can contact the State Work Agency (SWA) or the unemployment office for a list of potential candidates.  

Screen applicants 

  •  From here, applicants will complete Form 8850 to verify they qualify under one of the target groups. 

 File documents 

  •  Next, submit Form 8850 and either ETA Form 9061 or 9062 to the State Work Agency within 28 of the eligible new hire’s start date. 

 Monitor hours and wages 

  • WOTC-certified employees must work at least 120 hours during the first year of employment for an employer to claim credits, which are calculated as a percentage of qualified wages. * Note that employees in the TANF category must work 400 hours.  

 Claim tax credit 

  •  Use Form 5884 when filing to claim the WOTC. 

 Keep accurate records 

  •  Keep copies of all forms and supporting documents submitted to SWAs and track employee hours in the event of an IRS audit. 

Automated WOTC Programs 

 One hesitation for employees has been the complexity of the entire process. The time-consuming paperwork and frustrating deadlines were a burden for business owners. Employees often wondered if the time and effort were worth the trouble.  

 The good news is that there are now automated platforms for receiving and processing WOTC benefits. Employers can screen new hires through an integrated questionnaire and immediately capture results. This reduces processing time without the need for more staff. Additionally, it also improves the chances of accuracy and eliminates mistakes made because of human error.  

 The new approach to WOTC processing through automation can simplify the process for small business owners while saving millions of dollars in tax credits.  

Waters Hardy Provides Clarity to the Work Opportunity Tax Credit 

 With so much to take care of, it’s easy for small business owners to overlook the WOTC, but this can be a costly mistake. It pays to remember to ask potential new hires the necessary questions to determine if they would qualify for the WOTC.       

 Taking advantage of tax credits can be a full-time job, but you don’t have to do it alone. The team at Waters Hardy work with business owners to offer support in navigating the WOTC. We can help every step of the way, from identifying eligible employees, collecting supporting information, and submitting the required tax forms.  

 Contact us today and let us handle all your WOTC needs. 

Many business owners are unaware if they qualify for the Work Opportunity Tax Credit. Find out more information about how your business may be eligible for this tax credit today.

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