Work Opportunity Tax Credit helps businesses meet staffing needs and cut taxes

Anybody who’s ever looked for a job can tell you it’s a challenging process. And now, things are getting worse.

The U.S. Department of Labor’s Bureau of Labor Statistics (BLS) Job Openings and Labor Turnover Survey (JOLTS) data for July showed that available jobs that month dropped more than expected.

Even worse for those seeking work, the government data shows that unemployed Americans outnumber available jobs for the first time since the COVID-19 pandemic year of 2021. There are currently 7.24 million jobseekers and 7.18 million open positions.

Special circumstances complicate things: The latest BLS numbers are particularly discouraging for individuals who already face job hunting difficulties.

But the Internal Revenue Code has a way to help both these prospective employees and the companies that hire them.

The Work Opportunity Tax Credit (WOTC), administered in conjunction with the U.S. Department of Labor (DoL), is a federal business tax credit available to employers who hire individuals from certain groups who tend to consistently have trouble getting hired.

Specifically, these potential WOTC new hires come from one of the 10 targeted groups listed below.

1. Temporary Assistance for Needy Families (TANF) recipients;
2. Qualified unemployed veterans, including disabled veterans;
3. Formerly incarcerated individuals;
4. Designated community residents living in Empowerment Zones or Rural Renewal Counties;
5. Vocational rehabilitation referrals;
6. Summer youth employees living in Empowerment Zones;
7. Supplemental Nutrition Assistance Program (SNAP) recipients;
8. Supplemental Security Income (SSI) recipients;
9. Long-term family assistance recipients; and
10. Long-term unemployment recipients.

These individuals get jobs. And since the WOTC is, as its name says, a tax credit, it offers a dollar-for-dollar offset of tax the business owes when it hires these qualifying workers.

Time running out: The WOTC is not new. The business tax break has been around since 1996.

Technically, however, it’s a temporary tax break that keeps getting extended. Most recently, it was part of the massive federal spending and COVID-19 relief law enacted at the end of December 2020. That bill, the Consolidated Appropriation Act, 2021, extended the WOTC through Dec. 31, 2025.

If Congress does not act to keep the WOTC in the tax code, the end of this year will be the end of tax credit.

So, if you are a business owner looking to hire, at least look into whether a WOTC hire will work for you company. It could be your last chance to hire someone who also can help you cut your company’s tax bill.

Clearing WOTC-eligible hires: Okay, you’re on the WOTC train. The first part of the route to getting the tax benefit is to get certification that the individual you hire is certified as a member of one of the groups listed above.

Do this by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to your state workforce agency within 28 days after the eligible worker begins work. That office also should be able to answer questions about processing the form.

Even though Form 8850 is an IRS document, do not submit it to the federal tax agency. However, another federal office, can help here. The Labor Department has an online directory to direct you to your state’s workforce website. Some states accept the WOTC certification forms electronically.

Figuring and claiming the WOTC: Once you’ve hired a new employee who qualifies for the tax credit, your business then can claim the WOTC when you file its federal income tax return.

The credit amount generally is based on wages paid to eligible workers during the first year of employment. But other factors also can affect the amount of the tax credit. This includes such things as —

• the target group under which the employee qualifies,
• the number of hours worked, and
• the new hire’s wages paid during employment period applicable to the target group.

The final credit amount is calculation and filed using IRS Form 5884, Work Opportunity Credit, and claimed on IRS Form 3800, General Business Credit.

The maximum WOTC amount per new hire generally is $2,400. But a firm could get a credit for some qualifying employees of up to $9,600. As every business owner knows, any amount of tax relief is welcome.

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.

Plus, there’s no limit on the number of qualifying individuals an employer can hire to claim the WOTC.

You can find more on this tax break on IRS.gov’s Work Opportunity Tax Credit webpage. Also check out the Department of Labor’s WOTC quick reference guide for employers. Both those resources go into more detail on how adding WOTC eligible workers to your payroll can benefit not only someone seeking a much-need job, but also your business’ tax circumstances.

So check them and the WOTC out. And do so soon. If Congress lets the WOTC expire this year, getting eligible staff on your payroll by Dec. 31 could be your last chance to claim this tax benefit.

You also might find these items of interest:

• Being the boss tax basics
• Tax implications of business entity choices
• Tax breaks that can help businesses with hiring