Hiring tax credits can have a dramatic impact on a company’s tax liability. For example, by using the Work Opportunity Tax Credit, or WOTC, a company could receive up to $9,600 in federal tax credits for certain employees who are hired. If your organization could benefit from tax savings, this article is for you. Discover who qualifies, how to apply for those credits and what you need to do now to potentially save thousands at tax time.
How Does the WOTC Work?
The WOTC is a business tax incentive that allows companies to receive tax credits for hiring individuals who are part of targeted groups that have consistently faced significant barriers to employment.
Here are the top five WOTC-issuing states:
- Texas 209,363
- California 149,604
- Ohio 106,708
- New York 101,053
- Illinois 90,109
WOTC was created to help employees from certain groups move from economic dependency on various types of government assistance into self-support. The goal is for these candidates to progress into earning a steady income and contributing taxpayers. At the same time, participating employers would be able to reduce their income tax liability.
Who Qualifies for the Work Opportunity Tax Credit?
Eligibility for a WOTC is based on an employer’s hiring from specific groups that often face significant obstacles to employment. The amount of credit an employer can claim varies and depends upon which target groups are hired, the wages paid to those individuals in the first year of employment and the number of hours the employees worked.
- Who had a period of unemployment for at least six months (can be non-consecutive) in any one year.
- Temporary Assistance for Needy Families (TANF) recipients
- Having received support for 9 months in an 18-month period.
- SNAP (Food Stamp) recipients
- Receiving assistance for six consecutive months (or three months in a five-month timeframe).
- Designated community residents (Living in federal and/or renewal communities)
- Covers individuals between 18 and 40 years old.
- Long-term unemployed
- After being unemployed for 27+ consecutive weeks.
- Vocational rehabilitation referral
- Supplemental Security Income (SSI) recipients
- After receiving support for one month within a three-month period.
- Summer youth employee (Living in empowerment zones)
- Employment eligibility is between May 1st and September 15th.
- Individuals with a service-connected disability
How is the Work Opportunity Tax Credit Calculated?
If an employer hires an eligible employee from a target group, a federal tax credit will be available at the end of the year. The credit amount will be based on the number of hours the employee works and the total wages earned during the first year of employment.
- For any individual that works a minimum of 120 hours, the employer can choose to claim a federal tax credit equal to 25% of the individual’s first year wages, up to the maximum tax credit.
- For any individual that works a minimum of 400 hours, the employer can choose to claim a tax credit equal to 40% of the individual’s first year wages, up to the maximum tax credit.
Maximum Credit Available:
- Receives SNAP (food stamps) $2,400
- Veteran Eligibility based on disability:
- Hired one year from leaving service $4,800
- Unemployed for at least 6 months $9,600
- Unemployed Veterans
- At least 4 weeks $2,400
- At least 6 months $5,600
- All other WOTC Target Groups $2,400-$9,000
To claim a WOTC for an employee in the Temporary Assistance for Needy Families (TANF) target group, a different set of metrics are used. For these employees, an employer must have a member of this group working for up to 24 consecutive months.
- If the employee works a minimum of 400 hours in their first year, an employer is eligible to receive a tax credit equal to 40% of the first-year wages, up to the maximum tax credit.
- If the employee works a minimum of 400 hours in their second year of employment, an employer is eligible to receive a tax credit equal to 50% of the second-year wages, up to the maximum tax credit.
Top Three WOTC Target Group Hires (2021)
- SNAP recipients (1,289,314)
- Long-term unemployed (233,160)
- Designated community residents (163,285)
Note: Many other programs for hiring tax credits exist at the state and local level. These programs will require redundant information on each potentially eligible employee.
How do Employers Claim the Work Opportunity Tax Credit?
The WOTC is a federal tax credit and as such is limited by a company’s income tax liability, or the amount of Social Security taxes owed. The credit can be claimed as part of your annual tax-filing process by using Form 5884 and/or Form 3800.
Before the credit can be claimed though, an employer must obtain a Pre-Screening Notice. Also known as IRS Form 8850, this is used to ensure that the employee is in fact a member of one of the WOTC targeted groups.
Let Paycor and HIREtech Help
The WOTC program can provide a great benefit to businesses. It can also be overwhelming. Fortunately, there’s help.
Paycor and HIREtech have established an automated payroll feed that makes implementing a tax credit solution simple. Paycor can send all the information necessary to start claiming credits directly to HIREtech and the HIREtech software platform can easily integrate into most state tax programs in conjunction with your WOTC screening to maximize your tax credits.
Get in touch today to see how we can help you manage WOTC for your workplace.