Work Opportunity Tax Credit: What it is and how it helps veterans and employers
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Special tax credit works for businesses, veterans
Businesses often encounter difficulty in finding qualified workers. Military veterans frequently find it hard to get hired.
The Work Opportunity Tax Credit, or WOTC, can help both these groups.
What is a WOTC?
The Work Opportunity Tax Credit offers a tax benefit for businesses that hire individuals, such as veterans, who are having trouble finding work. This temporary tax break is in effect through 2019, unless renewed by Congress.
The credit was created in the mid-1990s, offering businesses a tax benefit for hiring workers in certain groups who are likely to have trouble finding jobs. Veterans were added to the eligible workers list in 2011.
“Handled properly, this is an excellent credit for even very small businesses to try to snag,” says Eva Rosenberg, an enrolled agent and author of “Small Business Taxes Made Easy.”
This is an excellent credit for even very small businesses to try to snag.
Up to $9,600 per employee tax credit
Employers can earn a tax credit for each qualifying worker that ranges from $1,200 (for qualifying young people hired to work during the summer) to as much as $9,600 (for certain military veteran employees).
The exact tax benefit amount that a business can receive depends on several factors, including such things as:
- How long the new worker was unemployed.
- The employee’s salary.
- The number of hours worked in the first year.
There is no limit on the number of individuals an employer can hire to qualify to claim the tax credit.
Employers must, however, follow certain steps to apply for and claim the tax credit:
- Find workers from credit-eligible groups.
- Fill out required forms.
- Submit forms to state workforce office.
- Claim the credit.
1. Hiring eligible workers
The first step is to find workers from the credit-eligible groups. For most businesses, this will mean a bit more work than simply taking the usual hiring steps.
What types of workers are eligible?
- Temporary Assistance for Needy Families, or TANF, recipients.
- Supplemental Nutrition Assistance Program, or SNAP (also known as food stamps) recipients.
- Designated community residents living in certain economically struggling communities.
- Vocational rehabilitation referral individuals.
- Supplemental Security Income recipients.
- Summer youth employees who live in certain challenged communities.
Source: U.S. Department of Labor, Employment and Training Administration
The IRS offers more information on the types of WOTC-qualifying workers in Form 8850 instructions.
Searching for workers through the open market — newspaper ads, Craigslist and the like — will likely provide too many often unqualified candidates, warns Rosenberg, the internet’s “Tax Mama.”
Referrals from people you know are sometimes useful, but make sure that recommended potential hires are qualified for both the job and the WOTC.
Rosenberg suggests checking with your local unemployment office or other government agency. These offices, she says, are good sources for people who really need a job and are likely to appreciate the opportunity and training your company can offer.
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2. Filling out the forms
Once an employer finds WOTC-eligible workers, it’s time for the paperwork. As with all things tax-related, proper forms and timely filing is critical.
“Make sure all the paperwork is done in advance of the hire or you won’t get the benefits,” says Rosenberg. “And file the credit forms on time.”
The key document is Internal Revenue Service Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to pre-screen employees. Employers also must send a written request to their state workforce agency to certify the new hire as a member of a WOTC target group.
WOTC application claim steps
- Complete page 1 of IRS Form 8850 by the day the job offer is made.
- Complete page 2 of IRS Form 8850 after the individual is hired.
- Complete ETA Form 9061 or ETA Form 9062 if the employee has been conditionally certified as belonging to a WOTC target group.
- Submit the completed and signed IRS and ETA forms to your state workforce agency within 28 days of the employee’s start date.
- After an employee is deemed WOTC-eligible, the employer claims the tax credit by filing IRS Form 5884 with its annual tax return.
Source: U.S. Department of Labor, Employment and Training Administration
Next comes the U.S. Department of Labor’s WOTC paperwork, ETA Form 9061. Known as the Individual Characteristics Form, this document and the IRS form assist state workforce agencies in determining an individual’s eligibility for the WOTC.
Note that some workforce agencies also might require copies of certain other types of documentation to prove that a worker is WOTC qualified. This might be the prospective employee’s:
- Birth certificate.
- Driver’s license or other government identification card.
- School ID card.
- Work permit.
Veterans also should be able to supply DD-214 or discharge papers, reserve unit contacts, and an official Letter of Separation or other agency documents issued only by the Department of Veterans Affairs.
Some job applicants might be pre-certified for the tax credit. In these cases, they will have ETA Form 9062, Conditional Certification form. This form indicates the person was tentatively determined as an eligible member of a WOTC target group. Such workers should give this form to a potential employer during the interview process or when hired.
3. Deliver to state, not federal, offices
Submit both the IRS and Labor Department forms together to your state workforce office, not to the federal offices that created the forms, within 28 calendar days after the employee starts work.
You generally can send in the forms by mail, fax or email. Many states also accept electronic submissions. Check with your state WOTC coordinators (a directory is available at the Labor Department website) for your options.
Remember, if the WOTC documents aren’t filed on time, the application for the tax credit will be denied.
4. Claiming the credit
Your state workforce office makes the final decision for each WOTC application. When the business receives the certification, then it can claim the tax credit with the IRS.
After receiving a certification from the state office, employers may file for the tax credit with the IRS. Generally, a business will claim the credit by filing IRS Form 5884, Work Opportunity Credit, with its annual tax return filing.
And as with all tax matters, keep good records of your WOTC claim.
Retain copies of IRS Form 8850, Labor Department Forms 9061 or 9062, any WOTC related letters sent to the state workforce office, proof of mailing or other submission method, and certifications issued by the state workforce office. You generally should keep these WOTC records for 3 years from the date of the tax return filing on which the credit was claimed.
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In effect through 2019
One downside of the WOTC is that it is a temporary tax break. It is part of what is known as the tax extenders, a collection of tax laws that must be renewed by Congress or they will expire.
That typically happens, with most temporary provisions being extended for at least a year. Most recently, Congress renewed the WOTC as part of the Protecting Americans from Tax Hikes, or PATH, Act signed into law in December 2015.
Because of the lagging job growth in the slowly recovering economy, the WOTC was given special attention in the PATH Act.
The work opportunity credit was extended through 2019, giving employers several more years of tax incentives to hire eligible workers, including armed forces veterans.
Searching for and screening job candidates who qualify for the WOTC, as well as applying for and claiming the credit, does take some diligence and time. But, says Rosenberg, “not only can you make a difference in someone’s life, you can really feel good about going to work.”
And you can cut your business expenses.
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