Businesses are always trying to find ways to reduce their taxes in order to save money, and tax credits are a great solution for this. The Work Opportunity Tax Credit (WOTC) is a lesser-known tax credit that can benefit your business. Under this tax credit program, companies have claimed an estimated $1 billion. According to the Internal Revenue Service (IRS), the WOTC credit authorization has been extended until Dec. 31, 2025, by the Consolidated Appropriations Act (2021).
The WOTC credit is available for businesses that invest in American job applicants who have struggled to find employment. By hiring an individual who is part of the WOTC credit-targeted group, such as a veteran or ex-felon, your business can claim this credit.
This type of tax credit benefits both candidates and employers. It provides businesses with an incentive to hire from larger applicant pools. For candidates, it can give them a new lease on life if their past record or lack of experience was holding them back.
How the WOTC Credit Works
This federal tax credit can be used by employers that hire candidates from several target groups that have proved to face "significant barriers to employment." This may also include those who have been unemployed for long periods of time. Business recruiters should review which individuals are eligible for the credit and then prioritize them. Of course, any candidate you choose should still meet the job requirements. Once new hires are certified for the WOTC and work a minimum of 120 hours, your company can claim the credit.
The tax credit maximums can reach “$2,400 to $9,600, depending on the worker category, number of hours worked, and wages earned,” according to Paycom’s Eric Weiss. Getting familiar with tax credits and how to use them can save your business thousands.
Many businesses have had to cut back on spending and reduce the size of their workforce due to the COVID-19 pandemic, but as businesses shift from remote to hybrid and in-person workplaces, their costs are rising once again. The WOTC credit and other tax credit programs can help them lower their federal income taxes.
How Much Can I Claim through the Credit?
The amount you can receive from the WOTC credit program depends on various factors, such as:
The target group that the employee falls into
How much their first-year payment is
The amount of time (in hours) they work during their first employment year
Each target group qualifies for a particular wage maximum. In general, your organization can claim a maximum of $9,600 per employee in tax credits annually, but the tax benefit will depend on which target group the individual belongs to. It's not a one-size-fits-all scenario; the target group matters. The wages paid within the first year of employment and the total number of hours the employee works are also important factors to consider.
Your tax credit claim can cover 25% or 40% of the qualified wages. Your business is able to claim 40% of qualified wages for an employee who works 400 hours in their first year. If your employee has worked anywhere from 120 to 399 hours, you can file a claim for 25%. The credit is nonrefundable and is limited by your total tax liability.
How Can My Company Receive Certification for the Credit?
The WOTC credit is used for wages paid to employees during their first year working for your company. For recipients of long-term Temporary Assistance for Needy Families (TANF), the credit is extended into a second year.
Your business will need to complete Form 5884 and pair it with Form 3800 to claim the WOTC when filing taxes. Tax-exempt organizations hiring veterans will need to file Form 5884-C.
The Pre-Screening Notice and Certification Request for the Work Opportunity Credit, otherwise known as form 8850, should be filled out by both the job applicant and the employer on or before the date the job offer is made. Once the employee starts working, you'll then have up to 28 calendar days to submit. The Department of Labor may require that you submit more forms depending on the employee type.
How Does My Business Benefit from the WOTC Credit?
Because the WOTC credit will reduce your tax bill dollar for dollar, your organization can allocate funds to other areas once you secure the tax credit. “WOTC is one of the few levers that a staffing firm or a business can pull that increase into their cash flow by as much as 40%,” states Vice President of Sales and Operations, Blake Bausmann of Clarus.
Where Tax Credit & Talent Sourcing Connect: Financial Struggles of Finding Qualified Talent
If a company wants to qualify for the Work Opportunity Tax Credit, it’ll have to find the right individual or individuals to achieve this. Doing so can be a difficult process. You’ll need to find candidates who belong to the IRS-defined target groups. Finding the right candidate can be time-consuming and expensive, so it’s normal to question whether the value of the tax credit outweighs the time and resources spent searching for these qualified talents. Bausman further states, “One in five Americans are eligible for the WOTC credit. Businesses are already hiring them. Not screening for the WOTC credit means leaving money on the table.”
Which Groups Qualify for the WOTC?
The nine groups targeted by the WOTC are:
Supplemental Security Income (SSI) recipients
Supplemental Nutrition Assistance Program (SNAP) recipients
Designated community residents
Long-term unemployment benefits recipients
Summer youth employees
Vocational rehabilitation referrals.
Target WOTC Qualifying Groups in Your Recruiting
The process of identifying, researching and networking with job candidates to convert them into job applicants is what's known as talent sourcing. Recruiters and HR managers add top job candidates to their talent pool database.
We’re here to help. WurkNow provides digital recruiting and staffing software that offers talent sourcing and pooling services, enabling businesses to find, vet, and hire individuals who meet their needs.