UPDATE: The Work Opportunity Tax Credit (WOTC) was extended through the 2025 tax year as part of Consolidated Appropriations Act, 2021 (CAA), the comprehensive appropriations (and COVID-19 relief and tax extenders) measure signed into law on Dec. 27, 2020. Check out my newer (2021) WOTC post that has more on how businesses can claim this tax credit.
Hiring extra employees during the holiday season — which we're smack dab in the middle of it in case you've missed the touting of Thanksgiving specials, early Black Friday deals and, yes, Christmas decorations already — is a time-honored business tradition.
Most of the time, these workers are temporary.
In some cases, however, those seasonal jobs turn into longer-term positions once the holiday paraphernalia is stored.
If you are looking to add to your permanent payroll, consider hiring someone who meets the qualifications under the Work Opportunity Tax Credit (WOTC). It could be a great gift for your new hires and your company.
But do so soon. You only have until the end of this year to get in on this potential employer tax break. Good news for workers and companies: Per the update at the top of this post, the WOTC now is available for the 2020 tax year.
WOTC timing is critical: The WOTC is a federal tax credit that encourages workplace diversity while opening doors to good jobs for many who've had trouble getting hired.
The credit, which is a better tax break since it directly lowers a tax bill dollar-for-dollar, is available to companies that hire individuals from certain groups who have consistently faced significant barriers to employment. But they need to do so soon.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 retroactively extended the eligibility period for employers to claim the WOTC. It now can be claimed if workers in the credit's qualifying categories began or begins work for the WOTC-seeking employer after Dec. 31, 2014 and before Jan. 1, 2020 2021.
Yep. You've got about six weeks the rest of 2020 to get the WOTC-eligible new worker on your payroll.
If you're interested, here's a quick overview.
What the WOTC is worth: Employers can earn a tax credit for each qualifying worker based on the worker's wages and hours worked.
The exact tax benefit amount that a business can receive depends on several factors, including such things as:
- How long the new worker was unemployed.
- The employee's salary.
- The number of hours worked in the first year.
- The target group (more on these worker categories in a minute) under which the new employee qualifies.
There is a cap on the amount of WOTC-eligible wages per qualified employee. It varies by group, but most have a cap of $6,000.
That means most employers can claim a $2,400 tax credit for each employee's first year.
Some qualifying employees, however, are eligible for a higher or lower maximum wage levels used to calculate the WOTC.
The amount of time the employees works also matters. There's no credit for an employee who works less than a total of 120 hours.
For an employee who works between 120 and 400 hours, the amount of credit is 25 percent of first year wages up to a ceiling determined by the target group.
For an employee who works over 400 hours, the credit is 40 percent of first year wages up to the amount determined by the target group.
You probably already noticed the "first year of wages" mention. That's the amount you use to figure your credit. That means you'll have to wait until you have one year's pay to apply to the Internal Revenue Service for the WOTC.
But there is no limit on the number of individuals an employer can hire to qualify to claim the tax credit.
And while the WOTC is a nonrefundable tax credit, meaning that it will zero out a tax bill but not get you a refund, any excess can be carried back up to one year or carried forward up to 20 years.
Which workers qualify for WOTC claims: Employers can earn a tax credit for each worker that meets WOTC target group basic qualifications.
The 10 categories of WOTC-eligible workers are:
- Unemployed veterans, including disabled veterans
- Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
- Designated community residents living in Empowerment Zones or Rural Renewal Counties
- Vocational rehabilitation referrals
- Summer youth employees living in Empowerment Zones
- Supplemental Nutrition Assistance Program, also known as SNAP or food stamp, recipients
- Supplemental Security Income (SSI) recipients
- Long-term family assistance recipients
- Qualified long-term unemployment recipients
The IRS' online WOTC page has details on each of these employee groups.
Filling out the forms: As with most interactions with the IRS and federal government agencies, there is paperwork.
An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. That means the employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work.
From 2014 through 2018, state workforce agencies have issued almost 10 million WOTC certifications.
Check with your state WOTC coordinators — the U.S. Department of Labor has an online interactive map to help you find your office — for your submission options, i.e., by snail mail or electronically. Those state workforce agencies also should be able to answer any specific questions you have about the form or process.
When it comes to claiming the actual WOTC after getting the required certification, you'll claim it as a general business credit on Form 3800 against your business income tax liability by filing that form along with Form 5884 as part of your business' normal income tax return. Don't forget about the carry-back and carry-forward rules.
If you're a tax-exempt organization that's hired a WOTC qualifying worker, you will claim the credit on Form 5884-C as a credit against the employer's share of Social Security tax.
Worth the effort: Yeah, there's some work involved. You have to find and then screen the WOTC eligible job candidates.
But the credit can be a valuable tax break for businesses, making it worthwhile for even (or maybe particularly) smaller ones to apply.
Even better, the jobs you give WOTC qualifying individuals could make a big difference in your new workers' lives and make you feel like a pretty darn good boss.
You also might find these items of interest:
- Business tax deduction changes under the TCJA
- A salute, shout out and checklist for U.S. veterans
- Remembering veterans' contributions and offering tax help for still-serving military personnel