It’s not easy to hire workers these days. But if your business hires a member of a certain group, you can claim the potentially lucrative Work Opportunity Tax Credit (WOTC). Here’s what you need to know to make WOTC a tax saver for your business.
This federal income tax credit is typically 40% of the qualifying first-year salary paid to an eligible employee, up to a maximum salary of $6,000. That translates into a maximum credit of $2,400 per eligible employee (40% x $6,000). Those help.
The credit rate is reduced to 25% of the first qualifying year’s salary for an employee who completes at least 120 hours but less than 400 hours of work. That translates into a maximum credit of $1,500 (25% x $6,000) per eligible employee. Not bad at all.
First year qualified wages means qualified wages paid for services rendered for a period of one year commencing from the date the newly hired employee begins employment.
Special rules apply to certain veterans, long-term family benefit recipients, and summer youth employees. More on those special rules later.
To become an eligible employee, your new hire must be certified by the applicable State Workforce Authority (SWA) as a member of a targeted group. You as an employer can: (1) obtain certification on the day the employee begins employment or (2) complete a notice of pre-screening, using IRS Form 8850 (Notice of Screening). and Request for Certification for the Work Opportunity Credit), on the date you offer a job to a potential employee. You then file Form 8850 with the SWA (not the IRS) within 28 days after the employee begins employment.
For links to the name, address, phone and fax number, and email address of the WOTC coordinator for each SWA, see here. A simple certification process is available to eligible unemployed veterans.
Which employees are eligible for the Work Opportunity Tax Credit?
You can only request WOTC to hire a member of a targeted group. Targeted groups include:
Aid recipients qualify for families with dependent children or an inheritance program.
Qualified former felons.
Designated community residents.
Vocational rehabilitation referral.
Summer qualified youth staff.
Qualifying supplemental nutritional support benefits recipients.
Eligible SSI recipients (anyone certified by a designated local agency as receiving Supplemental Security Income benefits under title XVI of the Social Security Act for any month ending in 60-day period ending on the date of employment).
Recipients of long-term family assistance.
Those who are long-term unemployed qualify.
See instructions to IRS Form 8850 for simple English definitions of these targeted groups.
This is the exercise.
As stated earlier, WOTC is typically 40% of the qualifying first year salary paid to an eligible employee, up to a maximum salary of $6,000. That translates into a maximum credit of $2,400 per eligible worker (40% x $6,000).
As stated earlier, the credit rate is reduced to 25% of the qualifying first year salary for an employee who completes at least 120 hours but less than 400 hours of work. That translates into a maximum credit of $1,500 per eligible worker (25% x $6,000).
Exceptions to the general rule
There is a higher limit of $12,000 on first-year wages paid to a qualified veteran who is compensated for a service-related disability and who was discharged or discharged within the year last. That translates into a maximum credit of $4,800 per eligible worker (40% x $12,000).
There is an even higher limit of $14,000 for first year wages paid to a qualified veteran who has been unemployed for at least six months in the previous year. That translates into a maximum credit of $5,600 per eligible worker (40% x $14,000).
If a qualifying veteran has both a service-related disability and has been unemployed for at least six months in the previous year, the first year salary cap is $24,000. That translates into a maximum credit of $9,600 per eligible worker (40% x $24,000). Rub!
WOTC is for recipients of a long-term family benefit equal to 40% of qualified first-year wages up to a maximum salary of $10,000. That translates into a maximum credit of $4,000 per eligible worker (40% x $10,000). Alternatively, you can claim WOTC for 50% of your second year’s qualifying salary up to a maximum salary of $10,000. That translates to a maximum second-year credit of $5,000 (50% x $10,000) and a maximum combined credit for two years of $9,000 ($4,000 + $5,000). Rub!
WOTC for a summer eligible youth worker (age 16 or 17 living in an empowered area) equal to 40% of the first year’s wages paid for any 90-day period from May 1 to September 15 or later with a maximum salary of $3,000. That translates into a maximum credit of $1,200 per eligible youth (40% x $3,000).
Side effects and limitations to the Work Opportunity Tax Credit
As an employer, claim the WOTC to reduce your federal income tax withholding on related wages in dollar terms. You can avoid that outcome by not claiming WOTC if the payroll deduction gives you a better answer on taxes (not likely).
The wages you take into account to claim the COVID-19-related employee retention tax credit (explain here) cannot be used to claim WOTC.
You cannot make a WOTC claim for an employee related to an employer (your business) or for certain employers of the employer or for any employee who has previously employed by the employer.
You cannot claim WOTC for amounts paid under a federally funded on-the-job training program. Additional work payments under Section 482(e) of the Social Security Act reduce qualifying wages. Wages paid to employees in strike substitution positions do not qualify for the credit. The considerations mentioned in this paragraph are unlikely to apply, but this is a full service analysis.
How to claim the Work Opportunity Tax Credit
Calculate and claim credit on IRS Form 5884 (Work Opportunity Credit). WOTC is one of the credits that comprise the General Business Credit (GBC) and is therefore subject to GBC’s limiting rules. Transfer the WOTC amount from Form 5884 to Form 3800 (General Business Credit), and take it from there. Or have your tax professional handle the details.
You can bring any unused WOTC money back for a year, and you can bring any unused amount back for 20 years. If there’s still an unused credit after the 20-year period closes, you can usually deduct the unused amount in year 21. Personally, I don’t think too much about taxes for the next 21 years. , and I suspect you do too.
As you can see, WOTC can be quite lucrative. So you don’t want to miss out if you hire a qualified worker. Ask potential new hires the necessary questions to determine if they are part of a target group. If so, that’s a significant point in their favor.
https://www.marketwatch.com/story/this-lucrative-tax-credit-pays-business-owners-who-hire-eligible-veterans-teens-and-other-workers-11626469641?rss=1&siteid=rss | This lucrative tax credit pays business owners who hire qualified veterans, youth, and other workers.