Hiring? You may be eligible for a valuable tax credit—the WOTC!
Originally published on January 23, 2023
Updated on October 31st, 2023
If you need to hire, be aware of a valuable tax credit for employers hiring individuals from one or more targeted groups. The Work Opportunity Tax Credit (WOTC) is generally worth up to $2,400 for each eligible employee. But it can be more — and in some cases, much more.
Whoa, $2,400? What is this credit?
The WOTC is available to employers who hire American job candidates who have consistently faced barriers to employment. Established in 1996, it has been extended/modified multiple times since. Generally, an employer is eligible for the WOTC for qualified wages paid to members of one of several targeted groups:
- Qualified members of families that receive assistance under the Temporary Assistance for Needy Families program
- Qualified veterans
- Qualified ex-felons
- Designated community residents
- Vocational rehabilitation referrals
- Qualified summer youth employees
- Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP)
- Qualified Supplemental Security Income recipients
- Long-term family assistance recipients
- Long-term unemployed individuals
In most cases, the WOTC is equal to 40% of up to $6,000 of annual wages paid to (or incurred on behalf of) employees in these groups. This creates a maximum credit available for the first year’s wages of $2,400 for each employee. However, the credit increases to $4,000 for a recipient of long-term family assistance.
With some veterans, however, that $6,000 threshold increases significantly depending on their life circumstances. Specifically:
- Use a $12,000/year threshold for disabled veterans hired less than a year after discharge or release from active duty. This creates a maximum first-year credit of $4,800.
- Use a $14,000/year threshold for veterans with aggregate periods of unemployment of six months or more in the year prior to being hired. This creates a maximum first-year credit of $5,600.
- Use a $24,000/year threshold for disabled veterans with aggregate periods of unemployment of six months or more in the year prior to being hired. This creates a maximum first-year credit of $9,600.
The employee must perform at least 400 hours of service in that first year. If the employee works fewer than 400 hours — but at least 120 hours — the rate drops to 25%.
For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth is $1,200 per employee.
The WOTC is currently scheduled to expire at the end of 2025.
Eligibility and requirements
Employers of all sizes are eligible to claim the WOTC. This includes both taxable and certain tax-exempt employers located in the United States and in some U.S. territories. Taxable employers can claim the WOTC against income taxes. However, eligible tax-exempt employers can claim the WOTC only against payroll taxes and only for wages paid to members of the qualified veteran targeted group.
Many additional conditions must be fulfilled before employers can qualify for the credit. Also, the credit isn’t available for employees who are related to the employer or who previously worked for the employer.
Employees must be certified by your state workforce agency to fall under these categories and descriptions. This includes the special veteran categories that increase the salary maximum used to calculate your WOTC. The certification generally must be requested within 28 days after the employee begins work. And in limited circumstances, the rules may prohibit the credit or require an allocation of it.
Claiming the credit
You and the job applicant must complete IRS Form 8850 on or before the day an employment offer is made. You have 28 days from the employee’s start date to submit this form to your state’s workforce agency. (Do not submit it to the IRS.) Additional forms might be required depending on the circumstances (for example, if the applicant is a qualified long-term unemployment recipient). Full instructions for this form are available on the IRS website.
Once you receive certification that the employee is a member of a targeted group, you’ll elect to take the credit. This is done by filing Form 5884 to claim your credit. (Tax-exempt organizations will file Form 5884-C.)
As with most any tax credits, rules and procedures for claiming the WOTC can be complex. Nevertheless, it can be valuable for most employers that hire from targeted groups. Contact your tax advisor with questions or for more information about your situation.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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