Planning on doing some hiring in the near future? If so, it’s a good time to get familiar with the federal government’s Work Opportunity Tax Credit, enabling employers to yield anywhere from $2,400 to $9,600 per worker in tax credits, depending on who’s hired.
What is the Work Opportunity Tax Credit (WOTC)?
WOTC is a federal tax credit program that incentivizes employers to hire from target groups that have consistently faced barriers to employment. There are 10 target groups, which include qualified veterans, long-term unemployed individuals, food stamp recipients, ex-felons, and more. (Find the full eligibility list here.)
“If you’re going to be hiring anyway, it’s a very easy way to see if you can save some money for the business,” says Sara Goldhardt, state and local tax director of accounting and tax consulting firm GBQ. “At the same time, it incentivizes workplace diversity and access to good jobs for good workers, so it has both financial benefits and some intangible ones as well.”
WOTC was established in 1996 and has been extended and revised repeatedly ever since. As Goldhardt alludes, the primary goal is to incentivize workplace diversity and facilitate access to jobs for American workers. The current WOTC version will be in place until December 31, 2025, at which point it’ll need to be voted on for another extension.
How does the process work?
If you’re an employer who hires an individual from one of WOTC’s targeted groups, you must apply and receive a WOTC verification certificate before you can claim any tax credits.
To do this, you must have the hire fill out IRS Form 8850, a two-page, pre-screening form that requires hires to submit their contact information and confirm which target group they fall within. Usually this form simply becomes part of the onboarding paperwork process for new employees. However, timeliness is essential. The forms have to be submitted within 28 days after the new hire's start date to your state workforce agency, who will approve WOTC eligibility. You’ll need to refer to your state workforce agency’s website for instructions on submitting the forms.
“It’s not an overly complicated process, it just takes diligence and making sure you’re getting employees through the process,” says Goldhardt. “There are providers that have a software program where it becomes an electronic process, which makes it even easier because then you’re not shuffling papers.”
What technology solutions can I use to streamline the process?
There are a variety of designated WOTC management solutions on the market that can help simplify the paperwork process, tracking of candidate eligibility, and calculating your returns. If you’re using an accounting solution or hiring and onboarding platform, that’s a good place to start. Ask your provider what they may offer.
Onboarding and hiring platform Workstream, for example, has a partnership with WOTC solution WOTC.com that allows its users to seamlessly add the WOTC paperwork into its already electronic onboarding process. With Workstream, you can also add a screening step during the hiring process to automatically pre-select for WOTC candidates when they apply. Once a candidate is marked as “hired” in the system, Workstream automatically triggers the necessary paperwork.
How do I calculate my returns?
While tax credits can range from $2,400 to $9,600 per worker, the average is usually on the lower end. The maximum amount will depend on the individual’s target group classification.
“For most of the targeted groups the maximum is $2,400, but with some groups, like veterans, you can generate a higher credit,” says Goldhardt.
You can only claim WOTC in the first year a qualified individual is hired, and you can’t claim the WOTC for employees who are rehired. The new hire must work at least 120 hours in that first year. After 120 hours, you can claim a credit equal to 25% of their first year of qualified wages. After 400 hours, you can claim a credit equal to 40% of their wages.
“I always tell my clients that it’s really a low time commitment on the employer side, especially if they use a provider to help with the backend piece,” says Goldhardt. “Most will request hour and wage data, and then calculate the credits for you.”
How can I use my tax credit?
If you’re like most restaurants, you’re a taxable employer, and as such, the WOTC will become a general business credit against your income taxes. Come tax season, you’ll need to file Form 5884 and Form 3800 along with your income tax return.
(For information on tax-exempt employers, click here. Tax-exempt employers can claim the WOTC only against payroll taxes and only for wages paid to members of the qualified veteran targeted group.)
Is there a way I can find candidates in WOTC categories?
If you’re interested in finding job seekers in WOTC targeted groups, the IRS recommends connecting with the American Job Centers. The American Job Centers assists employers in recruiting talent, hosting job fairs, conducting skills assessment, and providing support to workers transitioning to new jobs.
Job seekers can actually get WOTC pre-certifications from a state workforce agency or “participating agency” to tip off prospective employers during their job search. A “participating agency” is a federal, state, county, or local government agency or a grantee of these agencies. Examples include not only the American Job Centers, but also vocational rehabilitation agencies, city and county social service offices, department of corrections, Veterans Administration and related service organizations, and Workforce Innovation and Opportunity Act grant recipients.
When hiring on your own, you’re allowed to screen for WOTC candidacy using IRS Form 8850 and include information about WOTC candidacy in your hiring decisions. WOTC is designed to be compatible with federal anti-discrimination requirements. Again, the goal is to help people who have a hard time getting hired find employment. But note, all WOTC screening questions have to be answered voluntarily, and the WOTC questionnaire should always be paired with language that clearly states this.
Grace Dickinson is a reporter at Back of House. Send tips or inquiries to firstname.lastname@example.org.
[Photo courtesy Alex Green]