The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who hire people in certain target demographics who often experience employment barriers. This includes people coming off public assistance from COVID-related layoffs. Business owners who hire individuals coming off long-term unemployment of 27 weeks are eligible for a $2,400 to $9,600 tax credit per new employee. In the past, between 20 and 30 percent of a company’s employee base would typically qualify for the credit. This number has increased substantially due to high unemployment rates as a direct effect of the COVID-19 pandemic.
What Types of Workers Qualify for WOTC?
In addition to qualified long-term unemployment recipients, WOTC was put in place to incentivize workplace diversity and improve access to quality jobs for unemployed and disabled veterans, ex-felons, qualified IV-A recipients, designated community residents (DCRs), summer youth employees, vocational rehabilitation referrals, supplemental security income (SSI) recipients, Supplemental Nutrition Assistance Program (SNAP) recipients and long-term family assistance recipients.
Who Should Take Advantage of WOTC?
All employers can and should take advantage of this tax credit, including nonprofits. It is no secret that some businesses, especially those in the hospitality industry, are finding it hard to hire employees. Some are even going out of business due to staffing challenges. WOTC can allow an employer to offer a higher rate of pay, thus attracting and retaining talent.
By How Much Can WOTC Reduce an Employer’s Federal Tax Liability?
The highest dollar amount granted through this program is a $9,600 tax credit for unemployed or disabled military veterans after the employee surpasses 400 hours worked. When hiring other employees in WOTC’s targeted groups, the amount employers will be eligible to receive will vary. Typically, it is 25 to 40 percent of the employee’s wages in the first year of their employment. In most cases, employers are eligible for 25% of their employee’s wages if they work at least 120 hours and 40% if the employee works 400 hours or more in their first year.
If an employer hires just one new employee per month, whether due to attrition or growth, and 25% qualify for the $2,400 tax credit amount (lowest amount available), the employer will realize a $7,200 tax credit. 12 x 25% x $2,400 = $7,200 WOTC tax credit.
Was WOTC Extended for Another Five Years?
Yes, WOTC was extended for several reasons. The most important is because the program works. WOTC encourages employers to hire individuals who are on some sort of government assistance, decreases the government’s tax burden of benefits and gives employers incentive to consider hiring individuals who face challenges obtaining jobs. Because the program has proven to be successful, the government extended eligibility for businesses to participate through Dec. 31, 2025.
What Needs to Be Done to Participate in WOTC?
There are pre-screening and certification documents that must be submitted to the appropriate state workforce agency within 28 days of hiring an eligible employee. Employers can hire a payroll service to file the paperwork for them for a fee or they can follow the steps below to complete the process on their own.
- New hires complete WOTC forms electronically during on-barding (IRS 8850)
- Complete ETA form 9061
- Submit all forms to the state workforce agency within 28 days of the employee’s start date.
- Receive a determination from the state workforce agency, which usually occurs between 10 and 12 months.
- Claim the credit by filing the IRS form 5884
Keith Norris Miller is a Phoenix-based payroll agent with Heartland Payroll Systems. He is also the founder of TrustedPayrollAgent.com and has provided services for more than 500 companies over the last 10 years.
Did You Know
Through the Work Opportunity Tax Credit, Arizona business owners are encouraged to hire individuals from targeted groups, such as those coming off long-term employment of 27 weeks due to the pandemic, to obtain a federal tax credit of up to $2,400 per new hire.