Does your company qualify for the WOTC tax credit?
Business owners are facing operational and financial challenges, including those related to recruiting and employee retention. As of March 2022, the Employment Cost Index for total compensation in the Midwest rose by 5.1% compared to March 2021. The Work Opportunity Tax Credit (WOTC) may help hire the workers you need and provide significant tax savings.
The WOTC encourages employers to hire workers certified as members of 10 targeted groups (see below) facing barriers to employment. Employers who hire people from these groups and employ them for at least 120 hours can reduce federal tax liability by up to $9,600 per eligible employee. The value of this tax credit is determined by the target group under which the employee qualifies, the number of hours worked, and the wages earned in the period of employment applicable to that target group. In general, employers receive 25% of an eligible employee’s wages earned in the first year of employment if they work at least 120 hours. It is a one-time credit for each new hire, and an employer cannot claim the WOTC for rehired employees.
To qualify for the credit, before or on the day the job is offered, the individual needs to complete page one of IRS Form 8850 – Pre-Screening Notice and Certification Request. ETA Form 9061, Individual Characteristics, will also need to be completed. The signed forms must be submitted to the state workforce agency within 28 days after the eligible employee begins work. Business owners should submit WOTC application forms electronically via Minnesota’s automated online application system. If new to the WOTC Program, go to the Work Opportunity Tax Credit System Login site and select “Employer Registration” in the “New User” box to register for an account. This walks through the registration process.
Business owners can then claim the WOTC on their federal income tax return. To claim the WOTC, a business would include Form 5884, Work Opportunity Credit, when filing.
Target groups are as follows:
- Designated Community Resident
- Long-Term Family Assistance Recipient
- Summer Youth Employee
- Supplemental Nutrition Assistance Program Recipient
- Supplemental Security Income Recipient
- Qualified IV-A Recipient
- Qualified Long-Term Unemployment Recipient
- Qualified Veteran
- Vocational Rehabilitation Referral
Current law allows claims on qualified employees hired through December 31, 2025. Taking advantage of tax credits can be a full-time job, and Smith Schafer’s tax team is here to help. We help business owners understand their options based on eligibility, navigate federal and state requirements, and claim the WOTC. Contact us today to learn more.