The Work Opportunity Tax Credit, or WOTC for short, gets little attention these days. COVID relief programs such as the Paycheck Protection Program and Employee Retention Credits allowed businesses to claim huge amounts of money, much larger than the WOTC.
But those programs have now ended. While the WOTC is still around. Accordingly, small business owners should be aware of it. So, let’s run through what the WOTC is and how it works.
Work Opportunity Tax Credit Background
The WOTC is a tax benefit to encourage employers to hire targeted groups that face barriers to employment. Once set to expire after 2019, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended the WOTC through 2025.
In general, the WOTC is equal to 40% of up to $6,000 of wages paid to an individual who is in their first year of employment, performs at least 400 hours of services, and falls into one of these ten qualifying groups:
- Temporary Assistance for Needy Families (TANF) recipients,
- Unemployed veterans, including disabled veterans,
- Formerly incarcerated individuals,
- Designated community residents living in Empowerment Zones or Rural Renewal Counties,
- Vocational rehabilitation referrals,
- Summer youth employees living in Empowerment Zones
- Supplemental Nutrition Assistance Program (SNAP) recipients,
- Supplemental Security Income (SSI) recipients,
- Long-term family assistance recipients and
- Long-term unemployment recipients.
The last group is interesting since so many people have been out of work due to the Covid pandemic. A long-term unemployment recipient is someone out of work for 27 consecutive weeks who collected unemployment benefits at least part of the time. Many people rejoining the workface are probably in this group.
Wages subject to Social Security and Medicare taxes are qualified wages for the WOTC. But qualified wages can be zero if:
- The employee worked less than 120 hours,
- The wages were used for another employment credit (ERC, Qualified Sick and Family Leave, etc.)
- The employee worked for you previously (be careful if you furloughed employees during the pandemic and rehired them),
- The employee is your dependent,
- The person is a replacement employee during a strike or lockout,
Now let’s discuss the mechanics of how to claim the credit.
The first step to claiming the credit is filling out Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. You have 28 days from the hire date to file this with your state. The form asks the employee if they fit into one of the ten groups mentioned above, along with their name, address, and social security number. Consider making this form part of your standard onboarding process so you don’t forget about the work opportunity credit!
If the employee fits into one of the qualifying categories, the next step is to complete ETA 9061, Individual Characteristics Form. It is similar to Form 8850 with a bit more detail.
When both forms are completed they are sent to the state. We send the forms to the Employment Security Department in Washington State, for example.
The state then makes a determination if that employee qualifies. A couple points on that…
First, the state may require additional documentation. To qualify a veteran in Washington you need to submit the applicant’s DD214 or a letter from the Department of Defense or National Personnel Records that show active duty start and ends dates. For a disabled veteran in Washington you must also submit a Veterans Administration Disability Letter.
Second (at least in Washington), you can file an appeal if your claim is denied. Probably you will need to supply additional supporting documentation. You may need to include a copy of the applicant’s SNAP benefits letter, for example.
Claiming the Work Opportunity Tax Credit
Assuming the state approves your applicant, the credit is claimed when you file your annual income tax return on Form 5884, Work Opportunity Credit. Corporations claim the credit at the entity level and pass-through entities claim the credit at the individual level.
The credit is non-refundable, meaning you cannot claim it in a year without sufficient tax liability. However, the IRS lets you carry any unused credits forward for 20 years. Chances are, you will get to utilize it at some point if you find yourself unable to claim it in year one.
Higher Limits for Veteran Employees
Earlier I mentioned the credit is generally equal to 40% of up to $6,000 of qualified wages per employee, or $2,400. Certain qualified veterans have considerably higher limits as follows:
- $12,000 of wages ($4,800 credit) if the veteran is entitled to compensation for a service-connected disability and hired not more than 1 year after being discharged or released for active duty
- $14,000 of wages ($5,600 credit) if the veteran is unemployed for a period(s) totaling at least 6 months in the 1-year period ending on the hiring date
- $24,000 of wages ($9,600 credit) if the veteran is entitled to compensation for a service-connected disability and has been unemployed for a period(s) totaling at least 6 months in the 1-year period ending on the hiring date.
The WOTC has been easy to forget about lately. It was going to end in 2019. Then the PPP and ERC programs overshadowed it.
Those bigger programs ended in 2021, but the WOTC is still soldiering on. It might not be as sexy, but saving $2,400 or $4,800 per year is nothing to sneeze at.
This fairly straight forward credit should not be forgotten. So I will say it one more time: Don’t forget about the Work Opportunity Tax Credit!