The Work Opportunity Tax Credit (WOTC) is a valuable tax incentive for small business owners who hire individuals from certain targeted groups that face significant barriers to employment. This federal tax credit is designed to encourage workplace diversity and provide access to good jobs for eligible workers. In this blog post, we will explore the details of the WOTC, how it can benefit small businesses, and provide examples to illustrate its application.

What is the Work Opportunity Tax Credit?

The WOTC is a general business credit available to employers who hire individuals from specific targeted groups.

These groups include:

• Veterans
• Recipients of state assistance under part A of title IV of the Social Security Act (SSA)
• Individuals with felony convictions
• Residents in designated empowerment zones or rural renewal counties
• Individuals referred following completion of a rehabilitation plan or program
• Recipients of supplemental nutrition assistance under the Food and Nutrition Act of 2008
• Recipients of supplemental security income benefits under title XVI of the SSA
• Individuals experiencing long-term unemployment

How much is the Work Opportunity Tax Credit?

The amount of the WOTC is generally calculated as a percentage of the qualified wages paid to these employees during their first year of employment.

• General Rule: 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, certified as being a member of a targeted group, and performs at least 400 hours of services for the employer. This results in a maximum tax credit of $2,400 per eligible employee.
• Reduced Rate: For employees who perform fewer than 400 but at least 120 hours of service, the credit is reduced to 25% of the qualified wages, resulting in a maximum credit of $1,500.
• Varying Wages Limit: Special rules apply for certain veterans, long-term family assistance recipients, and summer youth employees. For these targeted groups, the WOTC can be even higher (or lower), up to 40% of $24,000.

It's important to note that employers cannot claim the WOTC for rehiring employees. Additionally, the credit is available only once for each new hire. You also cannot claim the credit for an employee who is related to the business owner.

This is a great opportunity and can reduce your taxes dollar-for-dollar.

How Does the WOTC Benefit Small Businesses?

• Tax Savings: The WOTC can reduce the federal income tax liability of a business, providing direct financial benefits.
• Diverse Workforce: By hiring from targeted groups, businesses can enhance workplace diversity and access a broader talent pool.
• Community Impact: Hiring individuals from disadvantaged backgrounds can positively impact the community and improve the business's reputation.

Steps to Claiming the WOTC

To claim the WOTC, small business owners must follow these steps:

1. Pre-Screening: On or before the day a job offer is made, the employer and the job applicant must complete IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit).
2. Submit Form 8850: The employer has 28 calendar days from the new employee’s start date to submit Form 8850 to the designated local agency (State Workforce Agency).
3. Certification: The designated local agency will certify that the employee is a member of one of the targeted groups.
4. Claim the Credit: After receiving certification, taxable employers file Form 5884 (Work Opportunity Credit) and include it with their business income tax return. Tax-exempt employers file Form 5884-C (Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans) to claim the credit against payroll taxes.

Example of WOTC Application

Let's consider a small business owner, Jane, who owns a local restaurant. Jane decides to hire John, who is part of a targeted group. Here’s how Jane can benefit from the WOTC:

1. Jane completes Form 8850 with John on the day she offers him the job.
2. Jane submits Form 8850 to the State Workforce Agency within 28 days of John’s start date.
3. The State Workforce Agency certifies that John is part of the targeted group.
4. Jane pays John $20,000 in wages during his first year of employment.
5. Jane claims the WOTC on her federal income tax return using Form 5884, potentially reducing her tax liability by $2,400 (40% of $6,000).

Conclusion

The Work Opportunity Tax Credit is a powerful tool for small business owners looking to reduce their tax liability while contributing to the community by hiring individuals from targeted groups. By understanding the eligibility requirements and following the necessary steps, small businesses can take full advantage of this valuable tax credit.