There are many tax credits that businesses can take for a variety of reasons. Knowing what these tax credits are and how to take them can allow businesses hundreds, or even thousands, of dollars per year in tax savings. One of these tax credits is the Work Opportunity Tax Credit.
What is the Work Opportunity Tax Credit?
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to businesses that hire new employees who are part of a targeted group. The tax credit, which began in 1996, has continually been extended, with the latest extension scheduled to expire December 31, 2025. The purpose of this credit is to garner workplace diversity by providing an incentive to businesses who hire employees that have faced difficulties in the hiring process. In most cases, businesses may only take the credit in the first year in which the employee was hired.
What is a targeted group?
For businesses to take the WOTC, they must hire an employee within a targeted group. Targeted groups can be any of the following:
- those who are veterans
- those that have been incarcerated or previously convicted of a felony
- those who receive state assistance under the Social Security Act
- those who live in areas designated as empowerment zones or rural renewal counties
- those referred to an employer following completion of a rehabilitation program
- those whose families are recipients of SNAP benefits
- those who receive supplemental security income benefits under the Social Security Act
- those who are long-term unemployed
Each targeted group has certain restrictions associated with it. These restrictions must be met in order for a new hire to be considered part of that targeted group.
How much are the tax credits for?
All taxed and certain tax-exempt businesses are eligible for the WOTC. How much each business is eligible for will vary depending on the amount of eligible employees and the amount of hours worked. Generally, businesses may receive a credit of 25% of eligible employees’ first year wages for hours worked between 120 and 400 hours in the first year of employment. A tax credit of 40% of eligible employees’ first year wages is given when the new employees work 400 or more hours. Businesses and accountants use Form 5884 to determine these calculations.
Example 1: John, who was long-term unemployed, works 200 hours and earns $5,000 in his first year of employment. The business would be eligible for a tax credit of $5,000 x .25 = $1,250
Example 2: Bill, a former veteran, works 1000 hours and earns $20,000 in his first year of employment. The business would be eligible for a tax credit of $20,000 x .40 = $8,000
Paper Trails is happy to assist you with claiming the WOTC for your business! Please contact us if you need assistance.