Leveraging the work opportunity tax credit in your business

Tax credits are the gift cards of the tax code. Businesses of any size should always be on the lookout for tax credits to offset their current or future tax liabilities.

The Work Opportunity Tax Credit (WOTC) is a lesser known federal income tax incentive for small businesses committed to expanding their workforce and supporting the employment of individuals who face barriers to employment. By strategically implementing the WOTC, small business owners can realize substantial tax benefits, year after year.

What is the work opportunity tax credit (WOTC)?

The work opportunity tax credit is a program that offers businesses a federal tax credit for hiring individuals from target groups.

The WOTC was designed by Congress to encourage employers to hire individuals from certain groups that have historically faced significant obstacles to employment -- the “targeted groups”.

Congress typically designs tax credit programs to encourage certain behaviors. This is a great example of Congress attempting to stimulate certain groups using the tax code.

These groups include military veterans, SNAP (Supplemental Nutrition Assistance Program) recipients, individuals living in designated community zones, and more.

Employers can claim a tax credit ranging from $1,200 to $9,600 per eligible employee, depending on the category under which the employee qualifies and the number of hours they work.

These tax credits are ultimately claimed on the business tax return but there is substantial up front work to ensure you can maximize your credits. The WOTC is one of the most difficult credits to claim, given the interplay between HR, state agencies and the IRS.

How does the WOTC program benefit employers?

Your business benefits from the WOTC in several ways, including tax credit savings, which can also enhance your overall financial reporting by improving cash flow management and tax liabilities:

• Tax credit savings: You can reduce your income tax liability by claiming tax credits for hiring from eligible WOTC target groups
• Access to a broader talent pool: Hiring from empowerment zones, designated community residents, and focusing on individuals who’ve faced long-term unemployment can increase workforce diversity and inclusion
• Support for hiring veterans and disadvantaged groups: Hiring qualified veterans, long-term family assistance recipients, or SSI (Supplemental Security Income) beneficiaries means you can receive additional credits, promoting a more inclusive workforce

Eligibility criteria for businesses

Any business, regardless of size, can qualify for the WOTC provided they hire individuals from the eligible target groups.

While taxable businesses can apply the credit against their business income tax, tax-exempt organizations (such as nonprofits) can claim the credit against payroll taxes for hiring qualified veterans.

Target groups for WOTC

To qualify for the WOTC, employees must come from one of the following target groups. There are substantial resources available that go into more specific definitions, exclusions and caveats to some of these target groups.

1. Qualified veterans

Qualified veterans can earn you a substantial WOTC tax credit, especially those who fit one or more of the following criteria:

• Are unemployed for at least 4 weeks but less than 6 months
• Have a service-connected disability and have been unemployed for at least 6 months
• Are receiving disability compensation from the Department of Veterans Affairs (VA)
• Are hired within 1 year of being discharged from active duty

2. Ex-felons

Hiring those who’ve been previously incarcerated can be a powerful way for businesses to give back to their communities while receiving tax incentives. To qualify, the new hire must:

• Have been convicted of a felony and released from prison within the last year
• Be hired within 1 year of their release

3. Long-term unemployed individuals

Those who’ve been unemployed for an extended period often face significant challenges when trying to re-enter the workforce. The long-term unemployed category helps incentivize businesses to offer these individuals job opportunities. To qualify, the individual must have been unemployed for 27 weeks or longer while receiving unemployment benefits.

4. Temporary Assistance for Needy Families (TANF) recipients

TANF is a program designed to help families with children who are in financial need. TANF recipients are eligible for WOTC if they:

• Have received TANF benefits for at least 9 months during the past 18 months before being hired
• Are hired for a new position that is a full-time job

5. Supplemental Nutrition Assistance Program (SNAP) recipients

Supplemental Nutrition Assistance Program (SNAP) recipients are eligible for WOTC. To qualify:

• The new hire must have received SNAP benefits for at least 6 months during the past 12 months before their hire date
• The employee must be hired within 2 years of receiving SNAP benefits

6. Supplemental Security Income (SSI) recipients

Candidates receiving Supplemental Security Income (SSI) are also eligible for WOTC. SSI is designed to provide financial assistance to low-income individuals who are elderly, blind, or disabled. The eligibility requirements for SSI recipients are as follows:

• The new hire must be receiving SSI benefits at the time of hiring
• The hire must fall within the target groups defined by the Social Security Administration (SSA)

7. Designated community residents

Designated community residents live in empowerment zones or renewal communities. They typically face higher unemployment rates and may have limited access to jobs. To qualify, the employee must:

• Live in a federally designated renewal community or empowerment zone
• Be hired for a full-time job position

8. Long-Term Family Assistance Recipients

Individuals who have received family assistance for long periods are also eligible for WOTC if they:

• Have received long-term family assistance for at least 18 months prior to being hired
• Are employed in a full-time position

9. Vocational rehabilitation referrals

Those referred to employers by vocational rehabilitation services may also qualify, but they must:

• Be referred to the employer by a qualified vocational rehabilitation agency
• Be hired within a certain timeframe after the referral

How to apply for the WOTC

It's common to see business owners find out that they qualify for WOTC only to be denied for missing the specific deadlines or forgetting to send one form in on time.

To successfully claim the WOTC, employers must:

1. Confirm eligibility before hiring

Before hiring a new employee, have them complete a pre-screening notice and the Individual Characteristics Form (IRS Form 8850):

• Pre-screening notice: This asks questions about the employee’s background to determine if they belong to one of the WOTC target groups. This notice helps to quickly assess whether the new hire might qualify.
• Individual Characteristics Form (IRS Form 8850): Have the new hire fill out IRS Form 8850, which provides more detailed information to determine eligibility for WOTC. Ensure that the form is filled out completely, as any missing information can delay the process.

2. Submit the certification request

Once you’ve confirmed eligibility through the pre-screening notice and IRS Form 8850, submit the certification request to your state workforce agency (SWA):

• Complete ETA Form 9061, also known as the WOTC Certification Request. This begins the certification process. It will request details about your new hire, including their employment status and any information related to their participation in any of the target groups.
• Note: You must submit this form to the SWA within 28 days of the hire date.
• Submit the ETA Form 9061 to the state workforce agency where your business is located. The SWA will then review the form and determine if your new hire qualifies for WOTC.
• Each state has its own processes for submitting the certification request, so be sure to check with your local SWA for specifics

3. Receive WOTC certification

Once the state workforce agency reviews your certification request, they will issue the WOTC certification if the employee is eligible. The certification process can take a few weeks.

• Certification confirmation: The SWA will send you a WOTC certification notice for each eligible employee. This notice confirms that the employee has qualified for WOTC and outlines the amount of credit you can claim based on their first-year wages.
• Keep documentation: Maintain a record of the WOTC certification notice along with your other employment records. This will be important when filing your taxes.

4. Claim the credit on your tax return

Once you’ve received the WOTC certification, you must claim the tax credit on your business’s return. This is calculated based on the first-year wages of the eligible employee.

• Use IRS Form 5884 to claim the WOTC on your tax return, a crucial step in your tax accounting process to ensure accurate deductions and compliance. This form calculates the tax credit for each employee you’ve hired from a WOTC target group.
• Include the WOTC credit as part of your business’s income tax liability when filing your tax return. The WOTC reduces the income tax you owe based on the first-year wages of your new hire.
• Ensure that you file your tax return by the appropriate deadline to claim the full credit

5. Keep records and monitor future certifications

The WOTC process doesn’t end once you’ve filed your taxes. Keeping accurate records is essential for future audits and ongoing compliance with the program.

• Maintain documentation: Keep records of all WOTC certifications, pre-screening notices, IRS forms, and related employee documentation. These documents will be important for verifying eligibility if your business is audited.
• Monitor ongoing eligibility: If you hire additional employees from WOTC target groups, repeat the certification process for each new hire. Each new hire is eligible for a separate credit.
• Integrate these savings: Incorporate savings into your overall process by using business accounting software for streamlined financial management

The tax benefits and specific amounts

The actual amount of the credit businesses can claim depends on the target group of the employee, the wages paid to that employee in the first year of employment, and the hours they work.

Generally, the credit is 40% of the first $6,000 in wages (up to $2,400) for employees who work at least 400 hours in the year. For veterans and long-term unemployment recipients, the credit can be higher, up to $9,600 per employee.

As you see, there are multiple variations of the credit, but the low end is $1,200 and the highest possible credit for one employee is $9,600.

It is important to note, there is no cap on the credit. If you have credits that exceed your tax liability, they can be carried forward for up to 20 years. As a worst case scenario, you are creating a bank of tax credits, which become a “tax asset”.

Practical examples of the WOTC

Here's how the WOTC works in practice:

Example 1: Hiring a veteran

A small tech company hires a veteran who has been unemployed for six months. The veteran earns $15,000 in the first year. Given the veteran's unemployment status, the company qualifies for a tax credit of 40% of the first $14,000 of wages, amounting to $5,600. The business claims this tax credit on their next income tax return.

Example 2: Hiring a SNAP recipient

A local coffee shop hires a new barista who is a 25-year-old SNAP recipient. In the first year, the barista earns $8,000 in W2 wages. The café is eligible for a tax credit of 40% of the first $6,000 of wages, which equals $2,400.

However, if the cafe owner did not send in the appropriate forms within 28 days of hiring, the tax credit would be $0.

Maximizing the benefit

Tax credits are something you must proactively harvest. The government will not knock on your door and tell you to claim the WOTC.

To fully leverage the WOTC, small business owners should:

• Incorporate WOTC screening into the hiring process: Make Form 8850 part of the application package to ensure no eligible hires are missed.
• Establish a relationship with your state workforce agency: They can assist in identifying eligible candidates and navigating the certification process.
• Use the credit strategically: Reinvest the savings from the tax credit into your business, whether through further training for employees, expanding your team, or purchasing new assets. We recently had a business owner save nearly $20,000 with the WOTC, which gave the business owner unbudgeted cash to invest into the business the following year.

Maximize your tax savings with Ramp

The WOTC can be a powerful tool for you to reduce income tax liability while fostering a more inclusive and diverse workforce. Hiring from target groups allows you to unlock significant tax savings that can be reflected on your income statement, helping to improve your business’s financial health.

But applying for WOTC is just one part of efficient business financial management.

Ramp’s corporate cards offer more flexibility than other types of cards, as well as a range of additional perks. You can use Ramp at all different types of stores while building your business credit score. Plus, Ramp helps you save more with its rewards and has credit limits up to 20 times higher than traditional banks.

Ramp also makes it easy to start an employee card program by allowing you to issue unlimited virtual credit cards. You can place spending limits or restrictions on where your employees can use the cards, empowering your company to spend as necessary while controlling for unnecessary expenses.

The information provided in this article does not constitute accounting, legal or financial advice and is for general informational purposes only. Please contact an accountant, attorney, or financial advisor to obtain advice with respect to your business.