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The Work Opportunity Tax Credit: Put WOTC to Work for You

Tuesday, May 10, 2022

Now that the dust has settled on tax season, were you disappointed by the refund your business received? Or wish you could have minimized the amount you owed? If so, you're not the only one.

"The pandemic and the staffing shortages and budget cuts over the years -- it's all added up to kind of create this perfect storm of just a disappointing tax season," said Bryan Cannon, CEO of Cannon Advisors, a Charlotte, North Carolina-based financial advisory services firm. "It's been an open wound that's been occurring for a while, and the pandemic has basically dumped salt on it."

While you can't jump into a time machine to change the past, you could have the power to transform next year's tax season into a windfall for your business — no matter what the world throws at you. Taking advantage of the Work Opportunity Tax Credit (WOTC) is the key.

In this blog, we'll answer some of the most commonly asked questions about WOTC, including:

  • What is the Work Opportunity Tax Credit program?

  • Who qualifies for the credit?

  • Is it worth it for your business?

  • How do employers claim the Work Opportunity Tax Credit?

  • How are credits applied?

We'll also cover how Heartland's hiring and payroll solutions can make taking advantage of the WOTC program a breeze.

Ready to start earning tens of thousands of dollars each year simply for hiring great employees? Let's dive in.

What is the Work Opportunity Tax Credit program?

The WOTC program uses federal tax credits to incentivize employers to hire job seekers from groups who have traditionally experienced barriers to employment. For each eligible new hire, employers can earn anywhere between $2,400 and $9,600 per year, per employee, depending on worker category, number of hours worked and wages earned. WOTC credits are part of the Internal Revenue Code and managed by the Internal Revenue Service (IRS) in conjunction with the US Department of Labor (DOL).

While no employer is required to hire employees from target groups or comply with WOTC, plenty of small businesses do, fueling the program's popularity.

Since its creation in 1996, the program has been extended several times; most recently in 2021. As a result, employers can take advantage of the program until December 31, 2025. Fortunately, that could soon change for the better. In February 2021, US Senators from both sides of the aisle introduced legislation to make the WOTC program permanent.

1 billion paid out every year

It's no wonder. WOTC continues to be popular, with the Department of Labor reporting about $1 billion in tax credits paid out every year across an average of two million claims.

An obvious financial gain paired with a sure-fire way to incentivize diversity and make quality jobs more accessible to all American workers? That's a cause everyone can feel good about.

Who qualifies for the Work Opportunity Tax Credit?

Talk of eligibility usually revolves around potential employees and whether they meet specific requirements, which we'll cover here. But before we dive in, it's important to note what kind of employers can participate as well.

All businesses can participate, but nonprofits face some restrictions

Regardless of size, industry or tax-exempt status, all employers with tax liabilities who make eligible hires can claim WOTC. Both for-profit and nonprofit organizations can participate in the program, but its scope differs for each type of employer.

Private sector businesses can potentially claim credits for hires who belong to one of ten qualifying groups, and apply the credit toward their federal tax liabilities. On the other hand, tax-exempt organizations are limited to reimbursement from hiring veterans only. Any credits nonprofits receive can be used to offset their Social Security tax burden. But that doesn't mean the program isn't worth it for nonprofits. Eligible veteran hires can generate some of the largest tax credits in the program.

Decision made

Eligible hires come from ten WOTC target groups

According to the Congressional Research Service, new hires who meet criteria from at least one of the following groups are WOTC-eligible, meaning their employer can claim the credit:

1. Qualified Supplemental Nutrition Assistance Program (SNAP) recipient: A person between the ages of 18 and 39 who is either a member of a family receiving SNAP benefits — which are also commonly known as food stamps — for the six month period ending on the hiring date, or individually received benefits for at least three months of the five-month period ending on the hiring date.

2. Temporary Assistance to Needy Families (TANF) recipient: An individual who is a member of a family receiving assistance for any nine of the 18 months prior to the worker's hire date.

3. Long-term TANF recipient: A member of a family that has been receiving TANF benefits for the past 18 months, or has exhausted TANF benefits in the past two years. Unlike other populations, an employer may claim the WOTC on behalf of a long-term family assistance recipient for two years.

4. Qualified veteran: A worker who served on active duty in the United States armed forces for at least 180 days, has been discharged for at least 60 days and meets at least one of the additional criteria listed below:

  • Member of a family receiving SNAP assistance for at least three of the past 12 months.

  • Veteran with a service-connected disability for which they are entitled to compensation and who is within one year of discharge.

  • Veteran with a service-connected disability for which they are entitled to compensation and who has been unemployed for at least six months of the prior year.

  • Veteran with an aggregate unemployment period of at least four weeks, but less than six months during the prior year.

  • Veteran with an aggregate unemployment period of at least six months during the prior year.

5. Designated community resident: An individual between the ages of 18 and 39 who has a principal place of abode within an empowerment zone, enterprise community, renewal community, or rural renewal county.

6. Vocational rehabilitation referral: A person with a physical or mental disability who is receiving or has received services under a state vocational rehabilitation program, the Department of Veterans Affairs Vocational Rehabilitation and Employment program, or an employment network through the Social Security Ticket to Work program.

7. Summer youth employee: An individual aged 16 or 17 who has a principal place of abode within an empowerment zone, enterprise community, or renewal community.

8. Qualified ex-felon: An individual who has been convicted of a felony under state or federal law and has a hiring date that is within one year of either the individual's conviction or release from prison.

9. Supplemental Security Income (SSI) recipient: An individual who has received SSI for any month ending within the 60-day period that precedes the hiring date.

10. Qualified long-term unemployment recipient: An individual who has been unemployed for at least 27 consecutive weeks and received unemployment compensation under state or federal law at some point during that period.

Coming to agreement

Some restrictions apply, even for those who belong to WOTC target groups

While some candidates and employees may meet the target criteria, there are some limitations. Because the program is designed as a hiring incentive, credits aren't retroactive. Which means you can't claim them for employees who already work for you. Rehires, family members who are classified as dependents or anyone who will become a majority owner of the business are also not considered eligible for WOTC.

Don't sell yourself short

Just now, you may be thinking the employees you need won't come from these groups. But without realizing it, you've likely hired at least a handful of people who do. And it's quite possible they are among your best workers.

25% qualify for WOTC

Roughly 25% of all US workers qualify for WOTC tax credits and as a group, make great employees. According to a study by Equifax, WOTC-eligible hires are less likely to leave their jobs within the first year of employment, remain in their jobs as long or longer than their non-eligible counterparts and advance through the ranks as quickly as their traditionally hired peers.

Is WOTC worth it?

Not only do WOTC-eligible hires simply make great employees, the credits you can receive also make participating in the program a win-win for business owners. And because there is no limit on the number of credits you can claim, there is no cap to the amount you can earn.

Let's break down how much you can expect based on different WOTC target groups:

Populations Eligible for the Work Opportunity Tax Credit

Target Groups

Max WOTC credit
per employee, per year

Qualified SNAP

$2,400

Temporary TANF recipients

$2,400

Long-term TANF recipients

$9,000

Qualified veterans

$9,600

Designated community resident

$2,400

Vocational rehabilitation referral

$2,400

Summer youth employee

$1,200

Qualified ex-felon

$2,400

SSI recipient

$2,400

Qualified long-term unemployment recipient

$2,400

Now that you see the amounts you could claim against your business' tax liability per employee, per year, it's easy to imagine how the savings could stack up — even if you're claiming the lowest possible credit.

Employees

Total Credits

1

$2,400

5

$12,000

10

$24,000

25

$60,000

50

$120,000

100

$240,000

Best of all, claiming WOTC doesn't preclude you from claiming other wage-based credits.

While the wages you use to calculate your WOTC credit can't be used to calculate other credits, you can claim more than one wage-based credit for the same employee. According to the IRS: "Provided the same wages are not used to calculate each credit, an employer may be able to claim the WOTC and another credit, such as:

  • the American Rescue Plan's Employee Retention Credit (ERC)

  • the Empowerment Zone Employment Credit

  • the Employer Credit for Paid Family and Medical Leave

  • the ERC for employers affected by qualified disasters"

  • and more

For example, let's say you have an employee who works in the kitchen Monday through Thursday at $12 an hour. That same employee does deliveries over the weekend for $8 an hour. You could potentially use the kitchen wages to claim WOTC and the delivery driving wages to claim the ERC — provided those wages were qualified, of course.

You don't necessarily have to divvy up qualified wages by role or the type of work employees do. You just have to avoid double dipping.

Signing papers

How do employers claim the Work Opportunity Tax Credit?

There are a couple steps you'll need to take in order to benefit from the WOTC program, including verifying new hires are WOTC-eligible, and filing the appropriate paperwork with state agencies.

Use the WOTC questionnaire to determine candidates' eligibility

You probably noticed that applicants have to meet pretty specific criteria to be considered part of a qualifying target group. And since that information isn't necessarily something that would come up in a traditional job interview or onboarding experience, employees are unlikely to volunteer it. That's why as the employer, it's up to you to find out whether candidates or new hires meet WOTC criteria.

Using the WOTC questionnaire during your interview process or giving it to new hires during orientation makes it easy. The questionnaire exists on IRS Form 8850 and asks candidates to check boxes next to various statements that apply to their work, military service, financial and criminal histories. It's important to obtain this information as early as possible in your screening, interviewing or onboarding process.

If candidates or new hires check at least one of the boxes on the questionnaire, it's likely they are part of a target group and your business would be eligible to claim the tax credit.

Take a little time to explain the "why"

While the questionnaire may seem like another step in the process for you, the nature of the questions are incredibly personal for the people answering them. Some candidates could hold back from self-identifying their eligibility due to feelings of shame or embarrassment. They might even believe that honesty could cost them the job instead of helping them get it.

To ensure you're starting off on the right foot with candidates or new employees, don't be afraid to establish trust by sharing the "why" up front.

If you choose to make the questionnaire part of your screening or interview process, explain that it isn't something you'll use to exclude candidates from the running, but one that might give them an edge over others. At the same time, stress the importance of honesty. Their answers will be verified by state agencies, so there's no way they — or you — can game the system.

Lastly, share what will happen after they answer the questions and how both of you will benefit: They're a valued candidate and your business is the potential recipient of a tax credit.

File forms with state workforce agencies to obtain certification

Once you've hired a WOTC-eligible candidate, the clock is ticking on your ability to claim the credit. Within 28 calendar days of a new hire's start date, you must complete Form 8850 and submit it to the appropriate state workforce agency. Some agencies may also require you to submit Department of Labor ETA Forms 9061 and 9062.

Form 8850

Once these agencies receive your forms, they will go through a vetting process which should ultimately end with you receiving certification to claim the credit.

Track WOTC employees' hours worked and wages

Because WOTC employees' hours worked and wages are tied to your ability to claim credits, it's important you track both things from the beginning. The IRS requires that a WOTC-eligible employee works at least 120 hours per year with the exception of TANF recipients, who must work at least 400 hours per year.

The program delivers larger credit amounts for more hours worked. The credit for all eligible employees who work between 120 and 400 hours is 25% of their qualified first-year wages — up to the maximum amount allowed according to their group. The credit jumps to 40% of qualified wages for employees who work more than 400 hours.

If all of that sounds like a tangle of red tape you don't want to cut through, let us do it for you. If you're ready to claim the maximum number of WOTC credits with a minimum number of headaches, contact us today to learn more.

Claim your credit at tax time

After you've received your certification and tracked eligible employees' hours and wages, it's time to collect those credits! File Form 5884, and claim the tax credit as a general business credit on Form 3800 in conjunction with your traditional income tax return documents. If you're a tax-exempt business owner, file Form 5884-C to claim WOTC.

How are Work Opportunity Tax Credits applied?

Because WOTC credits are nonrefundable, they are applied to your federal tax liability instead of issued as part of a refund. Also, because the number of credits you can claim are unlimited, it's possible you may be eligible for an amount of credits that exceed your liability. But that doesn't mean you can't still use them to your benefit.

Leverage general business credit rules to get the most out of WOTC

WOTC credits are like general business credits in that you can use carry-back or carry forward rules to benefit from every dollar you're entitled to. If you can't use part or all of your WOTC credit due to the tax liability limit, you can carry back the excess amount for one year. If you have an unused credit after carrying it back one year, you can also carry it forward to each one of the 20 tax years after the year you received the credit.

Using general business credit rules helps ensure your WOTC credits are never wasted.

Simply put: Taking advantage of the WOTC program can save your business tens of thousands of dollars next tax season and for years to come

Working on laptop

What's the easiest way to take advantage of the program?

Seeking certification and maintaining the timeline can be difficult to balance with all your other responsibilities. But you don't have to do it manually yourself. If you're interested in claiming credits without adding complicated manual reporting to your plate, a workforce management software is a great idea.

Heartland Hire is a recruiting and onboarding solution that allows you to automatically ask pre-screening questions to candidates or new hires. If they're WOTC-eligible, you'll see the estimated tax credit value in their profile. Heartland automatically captures all the important information you need, and completes and files Forms 8850 and 9061 for you within 28 days of the applicant's hire date. We also calculate your total credits earned.

At the end of the year, we prepare and send you a tax package that covers every certified employee, making it easy for you to file and claim all of your credits with confidence.

Ready to transform your tax liability simply for hiring great employees who will transform your business? Reach out for additional information on our hiring, payroll and HR solutions, or to get started.