Hiring a qualified candidate is a win-win for both employer and new hire. Did you know that in addition to a great new staff member, you could also earn a substantial tax credit? If so, would you apply for it? Most employers would say they would — and yet many companies either haven’t heard of or fail to take advantage of the Work Opportunity Tax Credit (WOTC). These companies are leaving money on the table.
What is the WOTC?
Created in 1996, the Work Opportunity Tax Credit is a federal tax incentive to promote the hiring of individuals in groups that face or have faced employment challenges. By incentivizing these hires, the U.S. government is helping Americans get off unemployment (and in some cases, government assistance) and establish a job history. In 2015, the WOTC was extended into 2019, and if you haven’t reviewed the program recently, you may be surprised by the new qualifying groups on the list.
The following individuals fall under the WOTC umbrella:
- Unemployed veterans, including disabled veterans
- Recipients of Temporary Assistance for Needy Families (TANF)
- Food stamp (SNAP) recipients
- Designated community residents living in Empowerment Zones or Rural Renewal Counties
- Vocational rehabilitation-referred individuals
- Recipients of Supplemental Social Security Income
- Summer youth employees living in Empowerment Zones
Tax credit calculation: how much can you expect to earn?
Employers that hire WOTC-eligible workers can expect to receive a tax credit equal to either 25 or 40 percent of a new employee’s first-year wages, up to the maximum for the particular group in which the employee belongs. The percentage is dependent on time worked in their first year on the job. If your new employee works at least 120 hours during his or her first year of employment, your company earns 25 percent. If the employee works at least 400 hours in the first year, that credit is 40 percent.
As mentioned, the amount of your tax credit also depends on the target group in which your employee belongs. For the majority of the individuals on the list, the tax credit is around $2,000.
Here is a list of estimated credits by group:
||Maximum Tax Credit
||Variable, enables up to $9,600
|Food Stamps (SNAP)
Source: Texas Workforce Commission
As you see in the box above, the maximum credit you can claim for summer youth interns from areas designated as “Empowerment Zones” is $1,200. Empowerment Zones are economically distressed communities. By designating these areas as Empowerment Zones, the government can provide aid that will help lift communities out of poverty by creating jobs, putting people back to work and stimulating the local economy.
If you hire an ex-felon, you could potentially earn a tax credit of $2,000. You might be afraid to risk hiring someone with a criminal record, but the potential benefits surpass the tax credit. SHRM reports that ex-offenders often turn out to be model employees, going the extra mile in appreciation for being given the opportunity to work and make a fresh start.
Veterans also fall under the WOTC tax credit. If you hire an out of work veteran, you can expect to earn the highest credit of $9,600. Some veterans have been injured and out of the work force for a while or they have a resume that is comprised of strictly military duties — a fact that might discourage employers looking for someone with more work experience. In many cases, this hesitation is unfounded or can be overcome. The skills and attributes many veterans bring to the job include leadership, tenacity, a sense of responsibility, the ability to collaborate and work independently, strong technical skills, and in some cases experience working in a foreign country. More than a symbolic gesture, hiring a veteran is a tangible way we can thank veterans for their service. When you consider all of these factors (plus a tax credit!) hiring a veteran just makes sense. [Small Business Trends]
Some new hires may fall under multiple WOTC categories. For instance, you may have a vet who has a family member who has been on temporary family assistance. In this case, you would default to the category with the highest tax credit.
Who’s benefiting from the WOTC?
Although the WOTC is an under-utilized tax credit, businesses across industries can (and do) apply. Many of these employers recognize that the value of hiring WOTC-eligible workers goes beyond a simple dollar amount.
According to Brett Mach, Director at EEPB Innova Tax, LLC, manufacturers tend to avail themselves of the WOTC. Mach points to engineering shops who see the opportunity in hiring veterans as mechanics because of the extensive training many veterans receive before they even step on the shop floor.
And let’s not forget the other people who are benefiting…the new hires who may have needed a leg up to gainful employment or an opportunity to prove themselves. When you think about it, the WOTC is truly a win-win.
How you can start claiming the WOTC
First you need to determine if your new hire qualifies for the tax credit. The appropriate tax forms need to be included with your standard onboarding information, and once completed by your new hire, need to be submitted to your state agency for review. This submission must be done timely, and many companies miss the window to apply for the WOTC. In order to determine your eligibility, the IRS Form 8850 and ETA Form 9061 must be completed at the time of hire and submitted within twenty-eight days.
If you are approved, there are follow-up and monitoring tasks that need to take place before you can realize the credit. The employee’s hours and wages must be tracked from the very first day he or she is hired. This employee data is used to calculate each credit, and the detail should accompany your business tax return.
Need a little help?
It’s not surprising that some companies aren’t taking advantage of the WOTC. For business owners, often just running the core business is more than a full-time job. Asking an owner to keep up on all the new tax codes and how to apply for incentives is just one more item on his or her mile-long to-do list.
The introduction of H.R.3652 to Congress in August would make the WOTC permanent. That fact, coupled with the popularity of the credit among politicians on both sides of the aisle, makes it likely that the WOTC will endure. Taking some extra time to apply, monitoring your new employee and doing some follow-up (or getting outside assistance to handle the paperwork for you) can earn you both a financial reward and a sense of satisfaction. It’s through both the WOTC and your efforts that more people have the chance to get back to work.
If you have questions about the WOTC or want assistance with any part of the application process, HR&P can help you maximize your credits. Please contact us.