Today’s businesses always seem to be facing complex tax issues as they try to keep pace with changing regulations. As a result, several credits and deductions that would benefit the company’s tax bill may be overlooked. The Work Opportunity Tax Credit (WOTC) is one such program that your business can qualify for.
What is the WOTC?
The WOTC was enacted as a federal tax incentive program in 2015 to give employers tax credits to hire candidates with special employment needs. Initially signed in 1996, the act has been extended several times and is authorized until December 31, 2020.
The program is jointly administered by the Department of Labor and the Internal Revenue Service (IRS). State agencies oversee the certification progress to ensure that employers hire candidates who meet the WOTC tax credit criteria.
The Department of Labor has recently awarded additional WOTC grants to states experiencing backlogs in the program.
WOTC grants employers a tax credit between $1,200 and $9,600 per worker from one of the targeted groups. These include veterans, ex-felons, vocational rehabilitation referrals, summer youth employees, as well as those receiving Temporary Assistance for Needy Families (TANF), and government assistance recipients.
The reasoning behind this tax incentive is to assist persons who are often left behind job-wise. Employers who may hesitate to hire from this group can benefit from tax incentives to include them in their recruitment plans.
Credit Requirements and Amounts
How much a company can receive in tax credits is largely dependent on which classification the worker is in, as well as their total earnings and hours worked. This credit can be claimed for two years for each eligible employee as follows:
- Hired recipients enable employers to take the tax credit for up to two years. The first year’s tax credit claimed is 40%, up to $6,000 of the first year’s wages, once the employee has worked 400 hours. If the employee has worked between 120 and 400 hours, a 25% tax credit is taken. An exception to this is that long-term family assistance recipients enable employers to take 40% of qualified wages up to $10,000 and 50% of second-year wages up to $10,000.
- Employment of long-term family assistance recipients allows a 40% credit of the first year with qualified wages up to $10,000 and 50% the second year.
IRS rules state that the WOTC must be applied against a tax liability. As in the case of general business credits, unused credit can be carried back one year and carried forward for 20 years.
Applying For The WOTC
Businesses applying for the WOTC must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” on or before the applicant’s first day on the job. Form 9061, The “Individual Characteristics Form,” must also be completed by the employer upon hiring the job candidate. Additional documentation may also be necessary to prove the applicant is part of a target group.
The forms are mailed to the state’s WOTC coordinator within 28 days of the employee’s first day on the job. Once the state verifies the employee is WOTC-eligible, the company can take the appropriate tax credits.
Employers can then claim the credit on Form 3800 against their income taxes, as detailed by the IRS.
Incentax can assist your business in identifying and maximizing state and federal tax credits through a streamlined process. Our team of experts evaluates programs and incentives the business is eligible for to maximize returns. Contact us to start taking advantage of tax credits to increase your company’s bottom line.