Every savvy business owner should be aware of ways they can help their company make savings or reap rewards for certain actions, and the federal government offers these rewards in the forms of tax credits for companies that meet certain criteria or carry out certain processes.
One well-known example of this is the Work Opportunity Tax Credit (WOTC) program, but what is it and how does it work? This guide will explain all you need to know.
What Is the Work Opportunity Tax Credits Program?
The WOTC is a federal tax credit program that has been made available to employers across the US. These employers can receive tax credits in response to hiring workers from specific groups. The groups are determined based on their relative difficulty of accessing employment.
In simple terms, the program exists to encourage employers to give working opportunities to those who are perhaps less fortunate or find it more of a challenge to get employed, with employers receiving point-of-hire tax credits for their actions.
In total, employers can claim over $9,000 per employee in tax credits each and every year through the WOTC program, and there are no limits regarding the number of individuals you can hire to claim the credit.
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How Is the Credit Calculated?
The tax credit for participants of the WOTC program is calculated based on three main factors:
- The category of the employees in question
- The wages paid to those employees in their first year of work
- The number of hours they work each week/month/year
Which Workers Qualified for the WOTC Program?
If your business is in the hiring phase and wants to get involved with the WOTC program by hiring some people who face barriers to employment usually, you’ll need to pay attention to those who fall into one or more of the following categories:
- Veterans
- Ex-felons
- Food stamp recipients
- Temporary Assistance for Needy Families (TANF) recipients
- Designated community residents in Empowerment Zones or Rural Renewal Counties
- Recipients of supplemental security income (SSI)
- Summer youth employees from Empowerment Zones
- Recipients of long-term family assistance
- Recipients of qualified long-term unemployment
You can take a look at this official eligibility chart for more details regarding which workers do and do not fall into the key categories of the WOTC program.
It’s worth noting, too, that your own relatives or dependents, including children, stepchildren, cousins, nephews, nieces, and so on, will not make your business eligible for this tax credit, even if they fall into any of the categories listed above. Majority owners of your business will also not be eligible.
How Can I Be Sure a Worker Qualifies for the WOTC Program?
When going through the process of hiring a worker for the WOTC program, you’ll need to make sure that they officially qualify, and you’ll also need to fill out two distinct forms: the IRS Form 8850 and the Department of Labor Form 9061.
The IRS Form 8850 is a pre-screening form. An applicant should complete the first page of this form after receiving a job offer, and the employer will fill out the second page once the applicant has been hired. This form should then be filed with your state workforce agency within four weeks of the person commencing their job.
The Department of Labor Form 9061, meanwhile, should be completed by the applicant, with you, as the employer, verifying the documents they submit to verify their claim. This form must also be submitted to your state workforce agency or employment agency, and this should be done as early as possible.
After both forms have been received, the agency will then send you a determination letter, informing you of the worker’s eligibility status for the WOTC program.
Which Wages Count Towards the Tax Credit?
After one or more eligible employees have been hired for your business, you’ll then need to work on calculating the amount of wages for the tax credit for each eligible employee. The credit is calculated based on wages paid in the first year of employment, so you’ll need to wait until a full year has passed before making the application with the IRS. All payments made to the employee can be included, as long as they are wages that your business has paid directly and for which your business has paid FUTA tax.
Final Word
The WOTC program is a great way to encourage businesses to bring more people into work who can have difficulties finding jobs in usual circumstances, helping to build a more diverse workforce while also giving employers a financial incentive to do so.