Unlike the Employee Retention Tax Credit (ERC) that came about as the result of COVID-19 and its effect on businesses, the Workforce Opportunity Tax Credit (WOTC) has been around since 1996. It only took ERC about two years to gain popularity, but almost three decades later, the WOTC is still mostly unknown.
So what exactly is the WOTC and how can it benefit your business? I am glad you asked. It is a federal tax credit ranging from $2,400 to $9,600 per hire, available to employers who hire workers from a ‘targeted group.’ These are workers who may otherwise face barriers to employment. They are likely employees you are hiring anyway, so you may have been eligible for credits of which you never took advantage. Here is a list of the targeted groups of employees that would be eligible for the credit:
- Qualified Short-Term Temporary Assistance to Needy Families (TANF) Recipients
- Qualified Veterans (SNAP Recipients, Disabled, Unemployed)
- Qualified Ex-Felons
- Qualified Designated Community Residents (residing in an Empowerment Zone) (Expires 12/31/2025)
- Qualified Vocational Rehabilitation Referred Individuals
- Qualified Summer Youth (residing in an Empowerment Zone) (Expires 12/31/2025)
- Qualified Supplemental Nutrition Assistance Program (SNAP) Recipients
- Qualified Supplemental Security Income Recipients (SSI)
- Qualified Long-Term Family Assistance Recipients
- Qualified Long-Term Unemployment Recipients (New!)
Details of each group can be found with the Department of Labor on their WOTC Eligibility Desk Aid. The last group on the list is fairly new which is for new hires who have been unemployed for more than 26 consecutive weeks at the time of hire and who received underpayment benefits at some point during the 26-week period.
While this is a federal program, it is managed by your state and can be completed in basically three steps:
- All applicants should complete the IRS Form 8850 to pre-screen for possible credit eligibility. This way, you know ahead of time if the applicant could make you eligible for the credit. Remember, the government wants you to hire these individuals, so they want you to know that before you make your hiring decision. The form simply asks for basic individual information and for them to check one of seven boxes. If someone checks at least one box, BINGO!
- If you hire a worker who completed this form and checked any of those boxes, you have a potential credit. You would then provide the newly-hired employee with the DOL 9061 Individual Characteristics Form. This is where the employee will provide additional details about their qualification. The above two forms must be filed with your state within 28 days of hire.
- If the employee meets the eligibility requirements, you will receive a certification from the state (Form 9063). Taxable employers can claim the WOTC as a general business credit against their income taxes and tax-exempt (non-profit) employers, who hire qualified veterans, can claim the WOTC against their payroll taxes.
Generally the credit is 40% of the qualified wages paid to the individuals once they reach 400 hours of employment in their first year of employment. While it may not be as great of an amount as the ERC, up to $9,600 per new hire is not something in which you want to miss out.
PayMaster is now offering WOTC processing as a service. Contact us for more information.
While I make every attempt to ensure the accuracy and reliability of the information provided in this article, the information is provided “as-is” without warranty of any kind. Federal laws may change. PayMaster, Inc and Romeo Chicco do not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained. Consult with your CPA, Labor Attorney, and/or HR Professional to ensure you are in compliance.