Last updated on August 22nd, 2022
If your organization is struggling to find talent – a common position given the Great Resignation of 2020/2021 and a continuously tight labor pool, you may want to tap into groups that have traditionally faced significant barriers to employment. While helping you address staffing challenges and boost workforce diversity, it may also result in valuable federal tax credits through 2025 – a worthwhile proposition given the escalating benefit and payroll spending you may be experiencing as you compete for talent.
The Work Opportunity Tax Credit (WOTC) has been around in various forms for decades. The Federal government updated it during the COVID pandemic to encourage employers to keep targeted workers on payroll and to encourage hiring them to rebuild staff following the worst of the pandemic. The WOTC was set to expire in 2020 but has been extended until December 31, 2025. It is jointly administered by the Internal Revenue Service (IRS) and the Department of Labor (DOL).
Targeted groups covered under the WOTC for taxable businesses include qualified IV-A recipients; qualified veterans (including disabled veterans); ex-felons; designated community residents; vocational rehabilitation referrals; summer youth employees; Supplemental Nutrition Assistance Program (SNAP) recipients; Supplemental Security Income recipients; long-term family assistance recipients; and qualified long-term unemployment recipients. For tax-exempt organizations, qualified veterans are the only group eligible. Employees related to the employer or certain owners of the employer are not eligible. (For definitions of eligible targeted groups, click here.)
On or before the day a job offer is made, you and the applicant must complete Form 8850, along with ETA Form 9061 or ETA Form 9062. Within 28 days of hiring an employee, you must submit the forms to the state workforce agency to verify the employee is a first-time qualifying member of a targeted group. You’ll receive confirmation on whether the employee meets eligibility criteria. Then, you can file for a tax credit ranging from $2,400 to $9,600 for each targeted worker through 2025.
Taxable employers claim the tax credit as a general business credit against income taxes on Form 3800. The credit cannot exceed business income tax liability.
- Qualified tax-exempt organizations claim the credit against payroll taxes using Form 5884-C. The credit cannot exceed Social Security taxes owed.
(For auditing purposes, all forms should be retained for a period of four years.)
There is no limit on the number of employees you can claim credits on, but there are limits on the value of credits. At a for-profit employer, a WOTC credit equals 40% of the first $6,000 of a targeted employee’s qualified first year wages for 400+ hours of service, for a maximum credit of $2,400. If an employee completed less than 400 hours of service but at least 120 hours, the credit is up to 25% of the first-year eligible wages or $1,500. A different maximum credit calculation may apply for qualified veterans and summer youth employees. Note! Certain wages – like federally funded on-the-job training – do not qualify for the WOTC credit.
At a not-for-profit employer, a WOTC for a qualified veteran equals 25% of qualifying first-year wages for 400 hours of service or 16% for at least 120 hours of service but less than 400.
To learn more, visit the DOL website, which has a fact sheet, reference guide, and more information on definitions of targeted groups. The IRS website has complete details, FAQs, links to forms, and more. The NYS Department of Labor website has additional information and resources.
If you have any questions or need assistance on this or any accounting, bookkeeping, tax, or audit requirements, RBT CPAs are here to help. Give us a call.