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What is the Work Opportunity Tax Credit (WOTC) and Does My Business Qualify?

Did you know that you could receive up to $9,600 in federal tax credits for your next new employee hire?  That’s right! With some basic understanding of this underutilized federal program, you could dramatically lower your tax burden immediately.  And with the right software automation, you can even do this without investing much time. The federal government offers The Work Opportunity Tax Credit (WOTC) program to help increase the opportunities for employment. It specifically aims to assist those that may otherwise face certain obstacles such as veterans, public assistance recipients, long-term unemployed and ex-felons. Additionally, the WOTC allows for-profit businesses to claim tax credits for hiring employees that fall under one of those categories.

The program is available to any US based business and is popular in industries such as hospitality and restaurants, home healthcare, construction, and manufacturing.

The rate of individuals signing up for unemployment benefits are at an all-time high, since the start of the pandemic. As employers start to hire again, it is beneficial to understand how this program works and how to apply.

Currently, there is no limit to the number of qualified employees a company can hire and claim the credit for. Employers are often unaware that the WOTC even exists or that they qualify.

Categories eligible for the Work Opportunity Tax Credit:

  • Long-term unemployment recipients
  • Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
  • Unemployed veterans
  • Designated community residents living in Empowerment Zones or Rural Renewal Counties Work Opportunity Tax Credit
  • Vocational rehabilitation referrals
  • Food Stamp recipients (SNAP)
  • Ex-Felons
  • Supplemental Security Income (SSI) recipients
  • Long-term family assistance recipients

WOTC is typically claimed on Form 5884 and is based on the wages paid to eligible workers during the first two years of employment. The credit amount total can be up to $9,600 for each qualified new hire, depending on the category they fall under.

The category also determines how long an employer can claim WOTC for and it typically lasts between a one to two-year time frame. Employers who do not take the full credit amount due to a tax liability limitation, may apply the credit retro-actively to one year or carry forward the unused credit 20 years or until the credit is used, whichever comes first.

How to determine eligibility

Determining if an employee is eligible starts at the new-hire application process. When a new candidate applies at your company, they will need to answer a few questions that will determine eligibility. If they are, you or your payroll service provider will need to complete the certification Form 8850 with the IRS. This needs to be completed on or before the day the applicant is offered employment and all required forms must be submitted within 28 calendar days of the employee’s start date.

Rules and restrictions

Once the application process is complete, the employer must retain all records regarding each WOTC claim for five years from the date of the written certification from the Employment Development Department, (EDD).

Employees are only eligible during the initial hiring. The credit does not apply to any rehired employees or any relative of the employer. Similarly, anyone residing with the employer is ineligible.

Employers can face fines and or imprisonment if they provide false information or withhold information.

New hire screening for WOTC eligibility and filling out the required paperwork can be time consuming.  Therefore, many companies have not taken the time to gain expertise and take full advantage of this program.  Automating the new hire screening process can be accomplished easily with onboarding software that offers integrated WOTC screening to do most of this work for you.

Contact us to learn more about our HR and payroll solutions to complement ATS— from timekeeping systems with companion mobile app, physical clocks, and customized job costing and labor distribution reporting.

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This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.