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A woman sits in the center of five chairs - Work Opportunity Tax Credit (WOTC)

What Is The Work Opportunity Tax Credit, And Who Qualifies For It?

Looking to reduce your tax burden while making a positive impact in your community? The Work Opportunity Tax Credit (WOTC) could be the perfect solution for your business. This federal program incentivizes businesses to hire individuals from targeted groups facing employment challenges. In this comprehensive guide, we’ll break down everything you need to know about the WOTC, from eligibility to claiming the credit.

Who Benefits from the Work Opportunity Tax Credit Program?

The WOTC program is designed to help both businesses and individuals. Businesses gain access to a wider talent pool and receive tax credits for hiring qualified employees. Individuals from targeted groups benefit from increased employment opportunities and a chance to build successful careers.

Who Qualifies as a WOTC-eligible Employee?

The IRS outlines several categories of individuals who qualify for the WOTC program. Some of the most common groups include:

  • Qualified IV-A recipients: Individuals receiving temporary financial assistance under Title IV of the Social Security Act.
  • Qualified veterans: Veterans or their family members who faced unemployment or received SNAP benefits.
  • Qualified ex-felons: Individuals hired within a year of their conviction or prison release.
  • Designated community residents: Youths (18-40 years old) residing in rural renewal counties or empowerment zones.
  • Vocational rehabilitation referrals: Individuals with disabilities referred by the state or Department of Veteran Affairs.
  • Qualified summer youth employees: Youths aged 16-18 working between May 1st and September 15th in empowerment zones.

This list is not exhaustive, and other groups may qualify based on long-term unemployment, family assistance, or SSI eligibility.

How Much Can Businesses Save with WOTC?

The WOTC program offers a significant tax credit for hiring qualified employees. Businesses can claim a credit of up to 40% of the first-year wages, with a maximum of $6,000 per employee (higher for specific groups). To receive the full credit, the employee must work a minimum of 400 hours within the first year.

Claiming the WOTC Credit: A Step-by-Step Guide

The WOTC program isn’t a simple tax deduction. Here’s a breakdown of the steps involved:

  1. Certification: Before claiming the credit, you must get the new hire certified as belonging to a WOTC-eligible group. This involves contacting your State Workforce Agency (SWA) or local unemployment office.
  2. Documentation: Once the employee is certified, complete the necessary forms, including Form 8850 and either ETA Form 9061 (taxable businesses) or 9063 (tax-exempt businesses). Submit these forms to your SWA.
  3. Employee Work Requirement: Ensure the hired employee works the required hours during the first year (typically 400 hours).
  4. Tax Claim: Finally, use IRS Form 5884 to claim the WOTC credit on your federal income tax return.
Additional Considerations:
  • Program Expiration: The WOTC program is currently authorized until December 31st, 2025. However, it could be renewed by Congress.
  • Taxable vs. Tax-Exempt Businesses: Taxable businesses can claim the credit in the current year, carry back unused credit for one year, and carry it forward for up to 20 years. Tax-exempt businesses can use the credit to offset payroll taxes.

Building a Stronger Community, One Hire at a Time

The WOTC program offers a win-win situation. Businesses gain access to a talented workforce while receiving valuable tax breaks. Individuals from under-served communities get a chance to build successful careers. By participating in the WOTC program, your business can not only save money but also contribute to a stronger, more vibrant community.

Ready to Learn More?

This guide provides a basic overview of the WOTC program. We recommend consulting with a tax advisor or your local SWA for further details and personalized advice. If you’re interested in discussing how the WOTC program can benefit your business, feel free to contact us today!

JS Morlu LLC is a top-tier accounting firm based in Woodbridge, Virginia, with a team of highly experienced and qualified CPAs and business advisors. We are dedicated to providing comprehensive accounting, tax, and business advisory services to clients throughout the Washington, D.C. Metro Area and the surrounding regions. With over a decade of experience, we have cultivated a deep understanding of our clients’ needs and aspirations. We recognize that our clients seek more than just value-added accounting services; they seek a trusted partner who can guide them towards achieving their business goals and personal financial well-being.
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