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.

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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 understanding and strategically implementing the WOTC, small business owners can realize substantial tax benefits, year after year. 

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As a small business owner, you should understand the specifics of the WOTC, the eligibility criteria, the application process, and practical examples to illustrate how you can effectively integrate this tax credit into their hiring practices.

What is the Work Opportunity Tax Credit (WOTC)?

The WOTC was designed by Congress to encourage employers to hire individuals from certain groups that have historically faced significant obstacles to employment.  We refer to these groups as “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. 

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

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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.  

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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.

Key eligibility factors for employers

• Business size: Any business, regardless of size, can qualify for the WOTC provided they hire individuals from the eligible target groups.
• Taxable and tax-exempt organizations: 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. Veterans: Including those who are unemployed, disabled, or receiving SNAP benefits.  Veterans are one of the largest hiring groups where we see WOTC claimed.
2. SNAP recipients: Individuals aged 18-39 living in a household that receives SNAP benefits.
3. Designated Community Residents: Living in an Empowerment Zone or Rural Renewal County.  
4. Vocational Rehabilitation Referred Individuals: People with disabilities referred after completing or while undergoing vocational rehabilitation.
5. Ex-felons: Individuals hired within a year of being convicted or released from prison.
6. Supplemental Security Income (SSI) recipients.
7. Summer youth employees: Aged 16-17, working for the employer between May 1 and September 15, and living in an Empowerment Zone.
8. Long-term unemployment recipients: Unemployed for at least 27 consecutive weeks and received state or federal unemployment benefits during part of the unemployment period.  In practice, we have seen this as the #1 target group post COVID.

The WOTC application process

Too often, we have seen business owners figure out they qualify for WOTC only to be denied for missing the specific deadlines or forgetting to send one form in on time.

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To claim the WOTC, employers must follow a detailed process, including timely filing of specific forms:

1. Pre-screening and certification: Before or on the day the job offer is made, employers must have the potential employee complete IRS Form 8850, "Pre-Screening Notice and Certification Request for the Work Opportunity Credit." This form must be submitted to the state workforce agency (SWA) within 28 days after the eligible worker begins work.
   
   Submitting this even 1 day late will result in a denied tax credit claim.  
   
   It is important to note, an employee can legally refuse to complete this form.  We urge our clients to integrate this into their standard hiring and onboarding process.  

2. Form 9061: In some cases, employers may also need to complete ETA Form 9061, or Form 9062 for conditional certifications received from a state vocational rehabilitation agency or other authorized entity.  Check with your tax advisor to see if this applies to you.
   

3. Claiming the tax credit: Businesses ultimately claim the credit on their federal income tax return. Taxable employers file Form 5884, "Work Opportunity Credit," with their tax return.  It is extremely important that you pass all of the relevant information from the employees you hired during the year to your tax preparer as they may be unaware of the credit or unaware of the employees you hired that qualify for this tax credit. 
   
   Tax-exempt organizations claim the credit against payroll taxes using Form 5884-C, "Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans."

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. 

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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.  

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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.

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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

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.

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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.  Be educated, implement processes and start creating tax efficiency!

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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.

Putting it together

Tax credits can be a lifeline as a small business owner.  The Work Opportunity Tax Credit represents a win-win for small businesses and job seekers from underrepresented “target groups”, offering financial incentives to employers while facilitating access to employment for individuals facing employment barriers. 

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By understanding WOTC and integrating this tax credit into their hiring practices, small business owners can not only contribute to the greater hiring economy but also realize significant tax savings that can support business growth and sustainability.

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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.

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