What Is the Work Opportunity Tax Credit (WOTC) Program?
If you’re considering hiring someone from a disadvantaged demographic, you may be eligible for the Work Opportunity Tax Credit (WOTC). This tax credit was created in order to incentivize businesses to hire employees from groups that commonly struggle to find jobs that pay well. If you’ve hired anyone from a disadvantaged demographic in the past, you may be able to retroactively claim this credit through the PATH Act as well.
Regardless of the timing of the hire, there are a few eligibility requirements that must be met in order for your business to qualify for the credit.
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It’s important to clarify that no WOTC-related credit can be received by the workers themselves. Certain demographics are eligible to qualify you, the employer, for the WOTC, in the event that you hire someone from one of these demographics.
Here are the primary demographics covered by the WOTC; further details can be found on the IRS website:
Veterans often struggle to find employment. After they spend time in the service, veterans may struggle to integrate into civilian life again. In order for a veteran to qualify you for the WOTC, they must fall under any of the following:
- A veteran must be receiving assistance under the Supplemental Nutrition Assistance Program (food stamps) for at least three of the first 15 months of employment.
- A veteran must be unemployed for a portion of the year before being hired.
- A veteran must have a service-connected disability.
Ex-felons typically struggle to find work as incarceration may create stereotypes and stigmas that can be difficult to shake off. Ex-felons qualify you for the WOTC program if they fall under either of the following:
- An ex-felon is hired within a year of being convicted of a felony.
- An ex-felon is hired within a year of being released from prison due to a felony.
Employees who struggle from low income or unemployment may also qualify for the WOTC Program. Some groups in this demographic include:
- Qualified IV-A recipients: This is a member of a family that has received assistance related to the Temporary Assistance for Needy Families (TANF) program for a 9-month period within 18 months of the date of hire.
- A qualified long-term unemployment recipient: This is an employee who has both been unemployed for at least 27 consecutive weeks when hired and has been receiving unemployment compensation during at least part of that time.
In addition to the above categories, several other groups may qualify, including:
- Summer youth employees: These are employees between the ages of 16 and 18 who only work between May 1 and Sept. 15. Summer youth employees must also reside in an empowerment zone. A list of these zones can be found in the instructions for Form 8850 under the section “Empowerment Zones.”
- Vocational rehabilitation referrals: These are employees who have a physical or mental disability and have been referred to the employer upon completing qualified rehabilitation.
That there are a few specific factors that will disqualify you from receiving the credit even if an employee is eligible under the above categories. These ineligibility factors are:
- If a candidate is a majority owner of the business.
- If a candidate is a former employee (with the one exception of summer youth).
- If a candidate is a relative or dependent. This includes nuclear family (spouse, children, and step-children) as well as parents, siblings, aunts, uncles, nieces, nephews, cousins, and even in-laws.
WOTC Screening: Form 8850
If you plan on hiring a WOTC-eligible employee, you must fill out the IRS pre-screening Form 8850 during the hiring process. The first part of the form is filled out by the applicant. If you decide to hire them, you fill out the remainder of the form.
This is followed by filling out the Department of Labor Form 9061. This is completed by the applicant and verified by the employer. (The candidate may already have Form 9062, which would then make this unnecessary.)
After the Hire
Once hired, do not send the forms to the IRS or Department of Labor. You must submit the forms, signed by both yourself and the employee, to your state workforce agency within 28 days of the employee beginning to work. The agency will evaluate the claim and determine your eligibility. They should respond with a letter.
Once approved, you must wait until the first year of employment is complete. After that, you may use Form 5884 to apply for the credit. On the form, fill out the number of qualified hours that the employee worked according to the following formula:
- 120-400 qualified hours = 25% of pay returned in the credit.
- 400-plus qualified hours = 40% of pay returned in the credit.
The pay may only be claimed for the first year unless it is a qualified long-term family assistance recipient. In that case, 50% of their second-year wages may be claimed.
Note: Specific qualifications for counted hours vary per category and can be found on the instruction page for the form under the section “Qualified Wages.”
Similar Tax Credits
Along with the WOTC, there are other tax credits and deductions that are specifically aimed at supporting disadvantaged individuals and the businesses that employ them. Some of these include:
- Disabled Access Credit: This credit is a non-refundable credit for a small business that spends money specifically to provide access to those with disabilities.
- Barrier Removal Tax Deduction: This is a tax deduction that a business may claim for expenses related to removing architectural and transportation barriers to enhance the mobility of either the elderly or those with disabilities.
- Empowerment Zone Employment Credit: Empowerment zones were created to enhance economically distressed areas. The credit reimburses employers who make qualified hires in these zones.
Whether you’re hiring an employee from an empowerment zone, interviewing a WOTC-qualified worker, or improving disabled access on your premises, it’s always worth looking for tax credits and deductions to help offset your costs.
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