Reviewed and updated Friday, Nov. 10, 2023
Since COVID-19 lockdowns began in March 2020, both employers and employees have been struggling to recover. It started with shutdowns, followed by workers' insistence on continued work-from-home arrangements, leading to the brief Great Resignation.
Now, three years later, many companies are still dealing with labor shortages.
The Internal Revenue Service has a suggestion for the firms. Check out the Work Opportunity Tax Credit (WOTC).
Tax breaks for certain hires: The WOTC is a federal business tax credit, administered in conjunction with the U.S. Department of Labor (DoL), that encourages companies to expand their hiring practices while simultaneously opening doors to good jobs for many individuals who've had trouble getting hired.
Since it's a credit, it's a better tax break. The WOTC directly lowers a business' tax bill dollar-for-dollar when it hires workers from certain groups who have consistently faced significant barriers to employment.
The WOTC has been around since 1996. Technically, it's a temporary tax break that keep 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.
But now is a good time for companies looking for employees to take advantage of the tax break.
Workers determine WOTC's worth: The value of the tax credit is determined by a variety of factors. 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.
Yeah, nobody said it would be easy.
But the maximum credit per new hire can range from $2,400 to $9,600. Both those amounts are nice chunks of change for any business.
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 individuals an employer can hire to qualify to claim the tax credit.
So adding WOTC eligible workers to your payroll and running the tax credit claim maze usually is worth it.
Qualifying workers: In general, the WOTC is available when a business hires workers that are certified as members of any of 10 targeted groups that typically have faced barriers to employment.
The IRS points out that the COVID-19 pandemic itself has helped create one of those groups, those who are long-term unemployment recipients. That's the case for the millions of people who've been out of work at one time or another since health-related company closures began more than 18 months ago.
The 10 target groups that are eligible for the WOTC credit are —
- Temporary Assistance for Needy Families (TANF) recipients;
- Qualified unemployed veterans, including disabled veterans;
- Formerly incarcerated individuals;
- 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 (SNAP) recipients;
- Supplemental Security Income (SSI) recipients;
- Long-term family assistance recipients; and
- Long-term unemployment recipients.
Start with certification: The first step in claiming the WOTC is meeting the certification requirement. An employer must first request certification by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to their state workforce agency.
The certification request is important, so let me repeat it. Submit the IRS Form 8850 to your states' workforce agency. The DoL has a directory where you can your state's workforce website. Some states can accept the forms electronically.
Again, though, do not send Form 8850 to the IRS.
Normally, employers must submit Form 8850 to their state agency within 28 days after the eligible person begins work. This year, though, a special relief provision gives employers until Nov. 8, 2021, to submit the form to their state workforce agency if they hire people in two groups: qualified summer youth employees living in Empowerment Zones and designated community residents living in Empowerment Zones.
To qualify for this deadline, eligible employees must start work on or after Jan. 1, 2021, and before Oct. 9, 2021.
Other requirements and details are available in Notice 2021-43 and the Form 8850 instructions.
Figuring and claiming the credit: Once the certification is met, eligible businesses claim the WOTC on their federal income tax return. This is done by figuring the credit on Form 5884, Work Opportunity Credit.
Then you officially claim the credit on Form 3800, General Business Credit.
Like I said, tax claiming maze. (And again, like I said, you can read more about other IRS forms at the Tax Forms Fiesta! page.)
Special rule, more answers: Finally, there's a special rule that allows tax-exempt organizations to claim the credit only for hiring qualified veterans.
These organizations claim the credit against payroll taxes on Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations. Their credit is limited to the amount of the business income tax liability or Social Security tax owed for tax-exempt organizations
If you want more WOTC information or have questions, check out the IRS Work Opportunity Tax Credit webpage.
You also might find these items of interest:
- Being the boss tax basics
- Tax implications of business entity choices
- IRS allows businesses to withdraw improper ERC claims
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