It’s common for business leaders to find themselves in unfamiliar territory when it comes to their company’s taxes, and tax credits specifically. The Work Opportunity Tax Credit (WOTC) is one tax credit that many are underutilizing, meaning they are leaving money on the table when it comes time to do their taxes.
WOTC helps transform government dependent people into self-sufficient workers while they earn a steady income and become contributing taxpayers. At the same time, WOTC promotes diversity in the workplace and facilitates access to good jobs for American workers. In exchange for hiring from these targeted groups, employers are able to significantly reduce their income tax liability.
With the WOTC program, one company can receive up to $9,600 in tax credits for each qualifying employee hired, with no limit on the number of qualifying individuals.
What is WOTC and is your business a candidate to receive WOTC credits?
While many companies may know that the Work Opportunity Tax Credit can grant them a large tax benefit for hiring qualifying employees, many don’t actually know how to identify a WOTC candidate. Because of this, many companies miss out on claiming qualified new hires and getting the resulting tax benefits.
Before being able to identify and capture your WOTC candidates, you need to understand who qualifies. Eligible new WOTC hires belong to one of several target groups that receive assistant from the federal government. These target groups include:
For further specifications, see the United States Department of Labor’s webpage on eligible WOTC hires.
How the WOTC can benefit your bottom line
The WOTC tax credit offers $1,200 to $9,600 to companies for each employee hired within one of several target groups. With designated categories, the program incentivizes employers to hire individuals who often bear roadblocks to employment, such as veterans with service-related disabilities and the long-term unemployed.
The exact credit amount is calculated based on the qualified target group, a percentage of wages, and the number of hours worked (at least 120 hours in the first year of employment).
Although any company that hires new employees can potentially benefit from the program, there are certain industry such as hospitality, healthcare, retail temporary staffing, transportation and security which see significant benefits. Factors that drive higher returns for these industries include high- turnover rates, urban dwelling employee base, a younger workforce, and unique hiring requirements such as hiring military veterans. The credit represents a permanent reduction in income tax and directly reduces a business’s effective tax rate. By leveraging this tax credit, your business will increase profits and obtain additional cash flow. There is no limit to the amount of credit available through the program as a whole or to a single employer.
Credits start with a great candidate screening process. Stop overpaying taxes each year. Screen all new hires to see if they are in any of the WOTC target groups. WOTC tax credits can be as much as $9600 per eligible employee! That can add up quickly. The maximum credit amount depends on the target group category the employee falls into, as well as the number of hours he or she works during the first year of employment. Employees must work at least 120 hours to be eligible for a tax credit of 25% of the employee’s first-year wages, up to $6,000, depending on the applicable target group.
If the employee works at least 400 hours, the eligible tax credit percentage increases to 40% of the first-year wages, up to $9,600, depending on the applicable target group. At the low end of the scale, a WOTC-certified new hire working at least 120 hours in the year could qualify the employer to claim 25% of the first year’s wages for a tax credit of as much as $1,500.
That’s a lot of money compared to the short amount of time it takes to screen new hires and handle the documentation.