David Rodeck

Are You Ready to Leverage the Work Opportunity Tax Credit (WOTC)?

You need employees to run your business, but hiring them isn’t easy or cheap. The Society for Human Resource Management estimates that it takes 42 days and costs $4,129 to bring on a new employee — and then, of course, you have to cover salary and benefits. Meanwhile, finding workers can be difficult in today’s tight labor market.

By taking advantage of the Work Opportunity Tax Credit (WOTC), though, you can lower your costs while tapping into available labor pools. But what is the Work Opportunity Tax Credit and how do you qualify? Here are answers to the most common questions.

What Is the Work Opportunity Tax Credit?

The WOTC is a federal tax credit established by the government in 1996 and currently set up to last until the end of 2019, according to the IRS. At this point, the government will need to extend the WOTC program for it to continue.

The program is available for businesses that hire new employees from groups who historically have trouble finding work. According to the Department of Labor (DOL), these include:

  • Veterans who have been unemployed for at least four weeks, have a service-related disability or are receiving government assistance through the Supplemental Nutrition Assistance Program (SNAP)
  • Others receiving government support through SNAP, Temporary Assistance for Needy Families (TANF) or Supplemental Security Income (SSI) benefits
  • Ex-felons
  • Those with disabilities who are going through state-certified rehab
  • People living in economically distressed areas designated as Empowerment Zones or Rural Renewal Counties
  • Summer youth employees age 16 or 17 who live in an Empowerment Zone

How Do We Qualify?

To qualify for the WOTC, you need to hire new employees from any of the above target groups.

The DOL notes that new employees must work at least 120 hours for your business to qualify for the credit. You will not receive this credit for hiring family members or former employees of your business, even if they belong to one of these categories.

There is no limit to the number of employees you can hire under this program. Each new hire would make you eligible for an additional tax credit.

How Much Could We Receive?

According to the DOL, your tax credit depends on how much you pay the employee, the number of hours they work and what target group they’re part of. If you hire someone for at least 400 hours in their first year, you receive a credit worth 40 percent of their wages up to the maximum for their target group.

For example, if you hire a SNAP recipient, the maximum possible credit is $2,400. You receive a credit for 40 percent of their first $6,000 in wages. On the other hand, if you hire a veteran with a service-related disability who has been unemployed for at least six months, the credit goes all the way up to $9,600, the largest possible WOTC amount in the first year.

How Do We Apply?

If you’re about to hire someone you think is eligible for the WOTC, ask them to fill out IRS Form 8850 first. This form will evaluate whether they meet the criteria for the tax credit.

If you believe they meet the standards, you should also fill out the ETA Form 9061 from the DOL — or ETA Form 9062 if an agency has verified that the employee is eligible for the WOTC. Then, submit both these forms to your state’s workforce agency. Do not send these forms to the IRS or the federal Department of Labor, as your state determines whether you are eligible. You must send in these forms within 28 days of hiring the new employee or else you will lose their credit.

The state workforce agency will review your application to see whether the employee qualifies. If they qualify, you will receive notice. Then you can claim the tax credit for the employee on your next federal tax return.

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How Can the WOTC Impact Health Insurance?

As the cost of health care continues to rise, using the WOTC can help your business offset the rising premiums. Your tax savings from the WOTC credit could be enough to cover the new employee’s first year of health insurance coverage and may even give you some extra money to cover other employees’ premiums.

Note that when you hire new employees from this target group, they may also be eligible for other health insurance programs, for example through the VA or Medicaid. Work with these employees to see whether they would receive the best benefit from using your company plan or by taking advantage of government services.

And work to keep the employee’s best benefit in mind throughout the employment life cycle. After all, it’s about more than just saving money — it’s about supporting vulnerable members of the workforce and helping them call your organization home.

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