How the WOTC Can Help When Hiring Long-Term Unemployed Workers

By September 8, 2020Tax Credits
tax credits

Most employers are looking to hire candidates with the best skills, experiences, and ability to match a job description. But unfortunately for job seekers, the longer they’re unemployed, the lower the odds they’ll get considered, according to a report by the World Economic Forum. A long gap in a resume has long been considered an obvious red flag.

However, did you know that hiring the long-term unemployed can also be a great opportunity for your company? According to Deloitte, hiring this often overlooked cohort can bring real value to your business. Evidence suggests that organizations that hire the long-term unemployed have a more loyal and reliable workforce with higher retention rates.

That’s not all. The federal government and state authorities have devised different incentive programs to address the thorny issue of long-term unemployment in the country. One of these incentive programs is the Work Opportunity Tax Credit (WOTC).

What is the WOTC?

The Work Opportunity Tax Credit (WOTC) is a provision of the Internal Revenue Code that allows organizations that hire persons from certain target groups who’ve consistently faced huge obstacles to employment. The long-term unemployed are among the WOTC-eligible target groups.

How Does the WOTC Work?

The amount of the WOTC is computed as a percentage of qualified wages paid to eligible employees during their first year of employment, up to a statutory maximum. As an employer, you may claim a tax credit equal to 40% of an eligible worker’s qualified wages if the worker has worked for at least 400 hours during their first year of employment, up to a statutory maximum.

If an eligible worker has worked for less than 400 hours, but for over 120 hours, you may claim a credit equal to 25% of the worker’s qualified wages. If the employee has worked for less than 120 hours, you may not claim the WOTC.

How to Qualify for the WOTC

While anyone who hasn’t been working for more than 27 weeks without success fits the description of a long-term unemployed individual, not everyone under that description is eligible for the Work Opportunity Tax Credit. For instance, you (as an employer) won’t get the tax credit if you hire the following groups of people:

  • Majority owners of your business
  • Former employees
  • Your relatives or dependents

Assuming that the long-term unemployed individuals that you’re hiring are eligible for the WOTC, there are several steps to take to ensure that your company qualifies for this tax credit. Firstly, you and the applicants must complete two forms during the hiring process and before the new hires start working. These two forms are the IRS Form 8850 and the Dept. of Labor Form 9061.

As soon as you hire a long-term unemployed worker, you’re required to submit the two forms of your state workforce agency for a determination on their eligibility for WOTC credit. You must submit the two forms no later than 28 calendar days after your new hire starts working. Failure to submit these forms as required will disqualify you from getting the tax credit.

Filing for the Work Opportunity Tax Credit

After receiving a letter from your state’s workforce agency confirming that your new employee is WOTC-eligible, your company becomes eligible for the tax credit. You can claim the tax credit by completing and submitting IRS Form 5884 with your business tax return.

But truth be told, figuring out your Work Opportunity Tax Credit is a complex and potentially painful process. Although there’s a lot of advice to be found online, each situation is unique. Even if you’re familiar with taxes, you might want to enlist some assistance from a tax credit expert.  

Get in Touch with Incentax Tax Credit Experts

Since 2011, Incentax has been helping companies in a wide range of fields and industries to qualify for State and Federal Tax Credits. Our dedicated Tax Credit Experts implement a proven, client-centric process to identify and maximize all available tax credits for our clients’ advantage.

If you have WOTC-eligible populations in your company and are interested in maximizing your tax savings, contact us today to learn more about how we can help.