How Employers Can Take Advantage of the Federal Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) provides tax credits to employers who hire employees who fall into specific targeted groups that can include:
- Qualified IV-A recipients
- Qualified ex-felon
- Designated community resident including those living in an empowerment zone, enterprise or renewal community, or a rural renewal county
- Vocational rehabilitation referral
- Qualified summer-youth employee
- Qualified food-stamp recipient
- Qualified SSI recipient
- Long-term family assistance recipient
- Qualified veterans and disabled qualified veterans
The Work Opportunity Tax Credit is available to taxable employers for qualified employees from all targeted groups.
The American Taxpayer Relief Act of 2012 has extended the WOTC for employers who hire qualified employees through December 31, 2013. This means that employees hired before January 1, 2014 and after December 3, 2011 are eligible. The credit is typically 40 percent of the first $6,000 paid to each employee of the targeted group during the first year of employment (the first $3,000 for qualified youth employees in summer programs).
For employees certified as qualified veterans, the credit may be higher – up to $9,600 for taxable employers and up to $6,240 for tax-exempt employers. The credit amount depends on a number of factors such as the veteran's length of unemployment prior to hire, the veteran's disability status, the number of hours the veteran works, hire date, and first year's wages.
How to Claim the WOTC
There are several requirements employers must follow in order to claim this credit. First, employers must file Form 8850, Pre-Screening Notice and Certification Request for Work Opportunity Credit, to verify that the employee belongs to one of the targeted groups. This form is filed within 28 days after the employee's hire date and the form is filed with the employer's state workforce agency. The employer must receive confirmation from the state that the job applicant is a member of the targeted group in order to qualify for the tax credit.
Employers must also file Form 3800, General Business Credit, attached to the employer's federal income tax return.
In addition, employers also need to file either ETA Form 9062 or ETA Form 9061. Form 9062 should be filed if the job applicant has received a Conditional Certification Form from a participating agency; Form 9061 should be filed if the job applicant has not received a conditional certification.
The Work Opportunity Tax Credit is available for employees in the qualified veterans group only for those qualified under IRC Section 501(c) and IRC Section 501(a). Since the tax-exempt employer does not pay federal income tax, the credit is taken against employer's Social Security tax by filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.
The Importance of Recordkeeping
Recordkeeping is very important when attempting to claim this tax credit. In addition to obtaining the certification from the state workforce agency, a recordkeeper can help the employer maintain records with pertinent information such as:
- Employee’s date of hire
- Qualification criteria for the WOTC
- Number of hours the qualified employee has worked for employer
- Employee wages during the tax credit period
Consider working with a professional recordkeeper who can help you complete all the necessary forms, submit information on time, and receive guidance. Learn more about how your business can obtain tax credit services for both the WOTC as well as other applicable tax credit opportunities.