Work Opportunity Tax Credit

The Work Opportunity Tax Credit Could Impact Your Bottom Line

Your business might be eligible for the Work Opportunity Tax Credit if you’ve hired people with histories that might have otherwise prevented them from securing gainful employment.

Keep reading to learn how the Work Opportunity Tax Credit (WOTC) incentivizes diverse hiring practices while also giving marginalized members of society and struggling individuals a chance at a new start.

What Is the Work Opportunity Tax Credit?

The WOTC is a federal tax credit designed to increase diversity and inclusion in the workplace while also providing stable and fulfilling jobs for skilled and qualified workers. The WOTC is only available for private sector employers, and it counts as a one-time credit that you can receive once for each new hire. There is no limit to the number of eligible hires for an employer.

To receive the WOTC, you must hire a new employee who belongs to one of several “target groups” (see below for more information). In most cases, employers who can verify their new hires’ affiliation with one or more of these target groups can receive one of two tax credits based on the employees’ work status:

  • 25% of first-year wages (up to the maximum credit) for employees who work at least 120 hours in a year
  • 40% of first-year wages (up to the maximum credit) for employees who work at least 400 hours in a year

The maximum credit per employee is about $9,600, although the exact maximum depends on several factors.

Employers who hire qualified long-term recipients of Temporary Assistance for Needy Families (TANF — one of the U.S. government’s federal assistance programs) may receive an extended tax credit under the WOTC program, which amounts to:

  • 40% of first-year wages (up to the maximum credit) for employees who work at least 400 hours in a year
  • 50% of second-year wages (up to the maximum credit) for employees who work at least 400 hours in a year

RELATED BLOG ARTICLE: Simple Tax Deductions for Small Businesses and the Self-Employed

WOTC Target Groups

To receive tax credits under the WOTC program, you must hire employees who belong to one or more of the following target groups.*

*All information in this section comes verbatim from the IRS WOTC website.

  • Qualified IV-A Recipient: An individual who is a member of a family receiving assistance under a state plan approved under part A of title IV of the Social Security Act relating to Temporary Assistance for Needy Families (TANF). The assistance must be received for any 9-month period during the 18-month period ending on the hiring date.
  • Qualified Veteran: A “qualified veteran” is a veteran who is any of the following:
    • A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least 3 months during the first year of employment.
    • Unemployed for a period totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period ending on the hiring date.
    • Unemployed for a period totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date.
    • A disabled veteran entitled to compensation for a service-connected disability hired not more than one year after being discharged or released from active duty in the U.S. Armed Forces.
    • A disabled veteran entitled to compensation for a service-connected disability who is unemployed for a period totaling at least six months (whether or not consecutive) in the one-year period ending on the hiring date.
  • Ex-Felon: A “qualified ex-felon” is a person hired within a year of:
    • Being convicted of a felony or
    • Being released from prison from the felony
  • Designated Community Resident (DCR): A DCR is an individual who, on the date of hiring:
    • Is at least 18 years old and under 40
    • Resides within one of the following:
      • An Empowerment Zone
      • An Enterprise community
      • A Renewal community
    • AND continues to reside at the locations after employment
  • Vocational Rehabilitation Referral: A “vocational rehabilitation referral” is a person who has a physical or mental disability and has been referred to the employer while receiving or upon completion of rehabilitative services pursuant to:
    • A state plan approved under the Rehabilitation Act of 1973 OR
    • An Employment Network Plan under the Ticket to Work program, OR
    • A program carried out under the Department of Veteran Affairs
  • Summer Youth Employee: A “qualified summer youth employee” is one who:
    • Is at least 16 years old, but under 18 on the date of hire or on May 1, whichever is later, AND
    • Is only employed between May 1 and September 15 (was not employed prior to May 1st) AND
    • Resides in an Empowerment Zone (EZ), enterprise community or renewal community.
  • Supplemental Nutrition Assistance Program (SNAP) Recipient: A “qualified SNAP benefits recipient” is an individual who on the date of hire is:
    • At least 18 years old and under 40, AND
    • A member of a family that received SNAP benefits for:
      • the previous 6 months OR
      • at least 3 of the previous 5 months
  • Supplemental Security Income (SSI) Recipient: An individual is a “qualified SSI recipient” if a month for which this person received SSI benefits is within 60 days of the date this person is hired.
  • Long-Term Family Assistance Recipient: A “long-term family assistance recipient” is an individual who at the time of hiring is a member of a family that meet one of the following conditions:
    • Received assistance under an IV-A program for a minimum of the prior 18 consecutive months; OR
    • Received assistance for 18 months beginning after 8/5/1997 and it has not been more than 2 years since the end of the earliest of such 18-month period; OR
    • Ceased to be eligible for such assistance because a Federal or State law limited the maximum time those payments could be made, and it has been not more than 2 years since the cessation.
  • Qualified Long-Term Unemployment Recipient: A qualified long-term unemployment recipient is one who has been unemployed for not less than 27 consecutive weeks at the time of hiring and received unemployment compensation during some or all or the unemployment period.

Applying for WOTC Status

Employers who hire WOTC-eligible employees must verify that the employee falls within one or more of the target groups listed above by filing a Form 8850 within 28 days of the employee’s start date. Following certified verification, employers can claim the credit on their Form 3800. Tax-exempt employers should instead use Form 5884-C to receive a credit against their Social Security tax.

If you have questions about the eligibility of yo!ur business to obtain the credit, talk to us today!

RELATED SERVICE: Bookkeeping Services

S.H. Block Tax Services Can Help Your Company Identify Helpful Tax Credits

As you can see, understanding and applying for the Work Opportunity Tax Credit can get complicated in a hurry. It can be difficult to identify which target group(s) your employees might belong to, and even once you do, gathering and filing the requisite paperwork can prove time-consuming.

For help understanding the WOTC or any other business-related tax credits you and your company might be eligible for, please contact S.H. Block Tax Services today to schedule your free consultation. Our tax professionals have decades of experience resolving tax problems and helping individuals and businesses successfully file complex returns.

Schedule your free consultation today by completing this brief form or calling (410) 793-1231. We’re confident we can help you resolve any tax problems you’re experiencing and maximize your returns, and we look forward to speaking with you soon.

Reference

Work Opportunity Tax Credit. (2018, August 13). IRS. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit

The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.

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