How the Work Opportunity Tax Credit (WOTC) Benefits Your Small Business
For small business owners, saving every dollar is crucial and can significantly boost your growth. The Work Opportunity Tax Credit (WOTC) is a valuable federal incentive that enables small businesses to save money while supporting individuals who face significant employment barriers. These individuals include certain veterans, former felons, summer youth employees, and recipients of long-term unemployment benefits.
By strategically incorporating the Work Opportunity Tax Credit (WOTC) into your hiring practices, you can unlock tax savings and contribute to a more diverse and inclusive workforce. Read below to learn how WOTC can benefit your small business.
Key Benefits of the Work Opportunity Tax Credit (WOTC)
The most immediate benefit of the WOTC for small businesses is the direct tax savings it provides. Unlike a deduction, which merely reduces your taxable income, a tax credit directly reduces your federal income tax liability dollar-for-dollar. This means real money back in your business. While the exact credit amount varies depending on the targeted group and the number of hours an employee works, you can claim up to $2,400 for most eligible hires and up to $9,600 for certain qualified veterans. For example, if an eligible employee works at least 120 hours but less than 400, you can claim 25% of their first-year wages (up to a maximum credit amount). If they work 400 hours or more, that number jumps to 40%.
Beyond the significant financial advantages, the WOTC also provides access to a broader, more diverse talent pool. By encouraging you to consider individuals from various backgrounds, the credit can help you discover new perspectives, unique skills, and dedicated employees. This can be especially beneficial in industries facing staffing challenges or high turnover, helping you build a more robust and resilient team. Furthermore, hiring from targeted groups enhances your employer brand and demonstrates your commitment to social responsibility, potentially attracting more customers and fostering a positive public image.
Ultimately, by leveraging the WOTC, you're not just saving money; you're also making a profound positive impact on your community. You're helping individuals achieve financial stability, gain valuable work experience, and become contributing members of the economy, all while strengthening your own business.
Who Qualifies for WOTC? Understanding the Targeted Groups
The WOTC is specifically designed to incentivize the hiring of individuals from "targeted groups" who often face difficulties securing employment. Understanding these categories is the first step to identifying potential eligibility within your new hires. The key targeted groups include:
Qualified Veterans: This broad category includes veterans who are unemployed for specific periods, those with service-connected disabilities, or members of families receiving Supplemental Nutrition Assistance Program (SNAP) benefits.
Temporary Assistance for Needy Families (TANF) Recipients: Individuals from families who have received TANF benefits for specific durations.
Supplemental Nutrition Assistance Program (SNAP) Recipients: Individuals aged 18 to 40 who have received SNAP benefits for specific periods.
Qualified Former Felons: Individuals hired within one year of their conviction or release from prison.
Designated Community Residents (DCRs): Individuals living in specific economically distressed areas known as Empowerment Zones or Rural Renewal Counties.
Vocational Rehabilitation Referrals: Individuals with disabilities who are referred from state-sponsored vocational rehabilitation programs.
Qualified Summer Youth Employees: Youth aged 16 or 17 who reside in an Empowerment Zone and are hired for temporary summer employment (May 1 to September 15).
Supplemental Security Income (SSI) Recipients: Individuals receiving SSI benefits.
Long-Term Unemployment Recipients: Individuals who have been unemployed for 27 or more consecutive weeks and have received unemployment compensation during that period.
Long-Term Family Assistance Recipients: Families who have received TANF benefits for extended periods.
It's important to remember that for the credit to be claimed, the employee must also work a minimum number of hours, typically 120, during their first year of employment.
How to Claim the WOTC: A Step-by-Step Guide for Small Businesses
Claiming the Work Opportunity Tax Credit (WOTC) involves a precise and time-sensitive process. The most critical aspect is adherence to deadlines, particularly within the initial 28-day window following the employee's start date.
Step 1: Pre-Screening and Initial Forms
This crucial first step happens on or before the job offer date. The job applicant and employer must complete IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit). This form is then submitted with either ETA Form 9061 (Individual Characteristics Form) or ETA Form 9062 (Conditional Certification), which the employer completes.
Step 2: Submit to Your State Workforce Agency (SWA)
Once the forms are completed, they must be submitted to the State Workforce Agency (SWA) in the state where your business is located. This submission must occur within 28 days of the employee's start date. Missing this deadline will typically result in forfeiture of the credit for that hire.
Step 3: Receive Certification
The SWA will review your application and the provided documentation to determine if the employee meets the eligibility requirements for a targeted group. Upon approval, your business will receive a certification confirming the employee's WOTC eligibility.
Step 4: Claim the Credit on Your Tax Return
Once you have the certification, you can claim the credit when you file your federal income tax return. You'll use IRS Form 5884 (Work Opportunity Credit) to calculate the credit amount based on the eligible wages paid. This amount is then transferred to IRS Form 3800 (General Business Credit), which is used to claim the credit against your income taxes. (Note: For tax-exempt organizations hiring qualified veterans, the credit can be claimed against payroll taxes using Form 5884-C.) Remember, the employee must work at least 120 hours (or 400 hours for certain groups) in their first year of employment to qualify for the credit. Keeping meticulous records of employee hours worked and wages paid is essential for substantiating your claim.
Tips and Best Practices to Make WOTC Work for Your Small Business
To truly maximize your WOTC benefits, it's wise to integrate the process seamlessly into your existing operations.
Integrate WOTC into Your Hiring Process: Consider adding simple pre-screening questions to your job applications or as part of your new hire onboarding paperwork. This can help you identify potential WOTC-eligible candidates early in the process.
Consider Targeted Recruitment: Don't hesitate to connect with local workforce agencies, vocational rehabilitation centers, and community organizations to expand your reach. These groups often work directly with individuals from WOTC-targeted groups and can be excellent sources for finding qualified candidates.
Don't Overlook "Hidden" Eligibility: Many new hires might qualify for WOTC without even realizing it themselves. A thorough screening process can uncover eligibility that might otherwise be missed.
The Work Opportunity Tax Credit presents a unique opportunity for small business owners to achieve a triple win: reduce your federal tax liability, gain access to a diverse and dedicated workforce, and make a meaningful contribution to your community. It's a strategic business decision that fosters growth not only for your company but also for individuals seeking a fresh start.
Explore the possibilities of the Work Opportunity Tax Credit for your small business. Review available resources on WOTC and schedule a consultation today with Payworks Payroll or a tax professional today to discuss how you can start leveraging this powerful incentive to its fullest potential.
PayWorks is not providing legal or tax advice. The information on this website is for informational purposes only and should not be relied upon as legal or tax advice. You should consult with your own legal and tax advisors before making any decisions about your financial situation.