How the Work Opportunity Tax Credit Can Help Your Business
Jerad Knott, Tax Shareholder
October 31, 2022
Hiring employees is one of the biggest and most expensive undertakings for any business, regardless of size or industry. But if you hire from a specific group, the government can make it less costly by offering the Work Opportunity Tax Credit (WOTC) to lower the overall business tax bill.
Since its inception in 1996, WOTC has benefited employers and employees. It enables businesses to hire individuals from certain groups who face significant employment barriers while offsetting the costs of hiring and employee retention.
This federal tax credit allows citizens to move gradually from economic dependence into self-sufficiency. It achieves this by creating job opportunities enabling them to contribute as taxpayers.
The credit focuses on qualified wages paid to these employees during their first employment year. Other employees eligible for long-term temporary assistance for needy families (TANF) will have the credit extended into the second year of employment.
Businesses must first become certified by the state to be eligible for the WOTC. To claim the WOTC, organizations must complete Form 5884 and include Form 3800 when filing their business taxes.
WOTC offers tax credits to incentivize workplace diversity and create easy access to good jobs for American workers. The target groups include:
People on long-term unemployment
Qualified Long-Term Unemployment Recipient
Food Stamp (SNAP) recipients
Summer Youth Employees
Designated Community Residents
Vocational Rehabilitation Referrals
Temporary Assistance for Needy Families (TANF) Recipients
Every target group has unique eligibility requirements that individuals must meet for the employer to qualify for the credit. For example, the veteran category is worth four times the amount of an eligible WOTC hire. It offers immediate tax benefits for companies that hire veterans.
The credit is available only for workers who work at least 120 hours. A reduction applies in the credit if the employee works for a minimum of 120 hours but less than 400 hours.
The benefits are only available for new hires. Wages paid to individuals who had previously been employees and rehired do not qualify. Additionally, wages already paid to specific individuals related to the employer or business owner will not be eligible.
WOTC can benefit your business in various ways. Some of the top benefits include:
1. Reducing Federal Tax Liability
The WOTC program decreases federal income through the credit it generates. In some cases, it can completely eliminate it. Employers will require income tax liability, allowing them to use the credit that does not exceed the income tax owed.
If the employee has no tax liability, they can still apply for the credit. Credits can be carried forward up to 20 years to reduce tax liability. Tax credits are based on the employee’s first-year wages. Qualified employees will have worked a minimum of 120 hours.
Reducing your company's federal income tax liability will decrease the cost of operating your business. You can use the funds you save on other projects or use them to expand your business.
2. Increasing Profitability and Cash-flow
All WOTC-qualified employees can increase your company's profitability by over 80% compared to non-qualified employees. The value ranges from $2,400 to $9,600 for every qualified new hire, based on the target group, the number of hours worked, and the job performed.
Increasing your cash flow with these tax savings will improve your margins and sustainability. WOTC will make your company profitable even with the increased cost of operating a business today.
3. No Limit on the Number of Employees to Hire
The credit does not restrict the number of new employees who qualify for the tax savings. You will receive the tax benefits of WOTC whether you employ 10 or 10,000 eligible employees.
4. 20% of New Hires Are Potentially Eligible
Companies can benefit from WOTC even without a history of this federal initiative. You will likely have already hired or will hire employees who meet the qualification criteria. About 20% of hires today qualify for the credit in most industries. Other industries may experience an even higher rate of qualification. The more you hire, the higher your chances of getting workers eligible for WOTC tax credits.
Improve Your Bottom Line with Tax Savings
The WOTC program has created a win-win situation for both employers and employees. Employees who previously lacked employment opportunities due to disabilities or were considered too risky now have a chance to make a living. On the other hand, employers enjoy better tax savings and increased profitability.
But getting the most out of WTOC benefits requires you to meet several obligations. These include submitting forms to state agencies, providing supporting documentation, monitoring hours and wages, and calculating tax credits.
Due to the complexity of administrative processes and accounting, companies require various resources to implement the program correctly. You can avoid this hassle by managing your records effectively to have all the necessary details to submit for claims.
This is where Lutz comes in. We understand all your personal, financial, and organizational needs regarding tax. When you collaborate with us, your life becomes easier, and you can rest soundly with effective accounting services. Contact us if you have questions or learn more about our accounting services.
We work to simplify complexities, help make critical business decisions, and confidently focus on the things that are truly important to you. We embrace your business as our own to spark the right solutions and help you thrive.