The Work Opportunity Tax Credit (WOTC) is a valuable federal tax credit available to employers who hire individuals from certain targeted groups that have consistently faced significant barriers to employment. Established as part of the Small Business Job Protection Act of 1996, the WOTC aims to incentivize businesses to diversify their workforce and provide job opportunities to individuals who might otherwise struggle to gain employment. Here’s a breakdown of the Work Opportunity Tax Credit, including who qualifies for it, the benefits of it, how to apply, and the importance of it in workforce diversity.
Who Qualifies for the WOTC?
The WOTC is designed to encourage the employment of individuals from specific groups. These targeted groups include the following.
- Veterans: Particularly those who are disabled, unemployed, or receiving SNAP benefits.
- Ex-Felons: Individuals who have been convicted of a felony and are hired within a year of their release or conviction.
- Designated Community Residents: Individuals aged 18-39 who reside in Empowerment Zones or Renewal Communities.
- Vocational Rehabilitation Referrals: Individuals who have a disability and have been referred to an employer following rehabilitation through a state-certified vocational rehabilitation program.
- Summer Youth Employees: Individuals aged 16-17 who work during the summer months and live in Empowerment Zones.
- SNAP (Supplemental Nutrition Assistance Program) Recipients: Individuals aged 18-39 who are members of a family that has received SNAP benefits for the previous six months or at least three of the last five months.
- Supplemental Security Income (SSI) Recipients: Individuals who have received SSI benefits for any month ending within the 60-day period ending on the hire date.
- Long-Term Family Assistance Recipients: Individuals who have received Temporary Assistance for Needy Families (TANF) benefits for any 9 months during the 18-month period ending on the hiring date.
- Qualified Long-Term Unemployment Recipients: Individuals who have been unemployed for 27 weeks or more.
Benefits of the WOTC for Employers
Employers can receive a tax credit that ranges from $1,200 to $9,600 for each eligible new hire. However, the actual credit depends on the target group and the individual’s employment period and hours worked. The credit is calculated as a percentage of the employee’s first-year wages:
- 25% of first-year wages for employees working at least 120 hours but fewer than 400 hours, up to $6,000.
- 40% of first-year wages for employees working 400 hours or more, up to $6,000.
The maximum tax credit varies by target group. For example:
- Summer youth employees: Up to $3,000.
- Long-term family assistance recipients: Up to $10,000 over two years.
How to Apply for the WOTC
To claim the WOTC, employers must follow these steps.
- Pre-Screening Notice and Certification Request. Complete IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” by the day the job offer is made.
- Submit to State Workforce Agency. Submit Form 8850 and ETA Form 9061, or if applicable, ETA Form 9062, to the state workforce agency (SWA) within 28 days of the employee’s start date.
- Receive Certification. The SWA will verify the employee’s eligibility and issue a certification.
- Claim the Credit. Once certified, employers can claim the tax credit using IRS Form 5884, “Work Opportunity Credit.” This form should be included in their annual business tax returns.
Importance of the WOTC
The WOTC serves as a crucial tool in promoting workforce diversity and inclusion. By encouraging employers to hire individuals from disadvantaged backgrounds, it helps reduce unemployment and underemployment among target groups, fostering economic growth and community development.
Moreover, businesses benefit by reducing their tax liability while gaining access to a broader pool of potential employees. The program also helps employers fulfill their social responsibility by contributing to the improvement of their communities and the lives of their employees.
Tax Help for Businesses
The Work Opportunity Tax Credit is a win-win for both employers and employees. By providing tax incentives to businesses, it encourages the hiring of individuals who face significant barriers to employment. Employers not only gain financial benefits but also contribute to a more inclusive and diverse workforce. Understanding and leveraging the WOTC can be a strategic advantage for businesses looking to make a positive impact while enhancing their bottom line. Optima Tax Relief has over a decade of experience helping taxpayers with tough tax situations.
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