How Does the Work Opportunity Tax Credit (WOTC) Work?
When you’re putting together a tax plan for your small business, one of the most valuable tax benefits you can find is a tax credit. Tax Credits reduce your taxes dollar for dollar, and sometimes, you can qualify with little to no changes to your daily routine.
The Work Opportunity Tax Credit (or WOTC) is one of those credits. We have a video on the subject you can watch here.
In today’s blog, we’re going to cover:
- Why the WOTC Exists
- Who the WOTC is for
- How much Credit the WOTC allows
- What qualifies you for the WOTC
Why the Work Opportunity Credit (WOTC) Exists
When reviewing any tax program or benefit, I love starting with the question, “Why?”
For example, why is the government allowing me to save money by doing this? With WOTC, it’s simple: The government wants people to work and wants people to have jobs.
They know that the average person can typically find a job (and that they don’t need to provide a tax credit for that). However, they also know that some groups of people can have trouble finding one. And here’s the key: They want to reward you, the employer, for hiring them.
Who Is the Work Opportunity Credit (WOTC) For?
The WOTC is for business owners who hire certain “target groups” designated under the program. By the way, there’s a pretty good chance that you may already be hiring these groups. In fact, if you’re not utilizing the WOTC, you may be missing out on a valuable tax benefit. So, you should look to target these groups in the future.
Target Groups
There are several target groups, each with varying maximum credits.
As you can see, this program can be a win-win-win:
- You get a new employee who fits your company.
- The employee finds a good-paying job.
- The government pays a one-time credit for removing people from long-term assistance.
Again, you may already be hiring people who fall into one of the groups without knowing it.
Let’s say you hire John: Do you really think that it’s going to come up in casual conversation that he’s receiving SNAP benefits during the interview process because he’s been down on his luck?
Absolutely not. John’s never going to disclose that during the hiring process.
How Much Is the Work Opportunity Credit?
The WOTC ranges from $1,200 to $9,600 (depending on which target group is hired).
However, it is not a flat credit that employers get just for hiring. The credit is a percentage of the wages paid over the first year of the hire. There is no cap, no limit to employees who qualify—and any excess carries forward for 20 years.
Let’s say you hire a military veteran who was unemployed for 4 weeks: That qualifies for a credit of $2,400. During their first year, you pay him/her $40,000 in wages.
40% x $40,000 = $16,000.
In this example, $16,000 is higher than $2,400. So, you are eligible for a $2,400 credit.
What Do I Need To Do To Make This Happen?
First thing’s first. This only applies to new hires.
The Work Opportunity Credit cannot be claimed on:
- Previously-hired employees
- The employer’s family
- 1099 Contractors
Additionally, you must:
- Request the qualifying info from the new hire (the day of the offer)
- File that information with the state department of labor
- Have the employee work a minimum of 400 hours in the first year
Professional Help
Next, you simply file a form at the end of the year with your return. If this sounds a little more complicated, Ironclad Wealth Management is here for you. As part of our financial planning process, we identify if the Work Opportunity Tax Credit (WOTC) could apply to you.
From there, we have specialized vendors who do it all for you. All you have to do is send the custom link to your new hires—and they handle the rest.
I hope this helped you understand the WOTC in a short, easy-to-read way.
If you'd like to learn more, please reach out and we will be happy to help.
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