Every business wants to keep as much profit in their pocket as possible. One strategy to do this is to take advantage of the Work Opportunity Tax Credit, or WOTC. This federal tax credit can be a highly effective hiring strategy that allows you to save money while sourcing talent for your organization. If you’re curious to see how it might impact your finances, use our WOTC calculator for a quick snapshot.
Continue reading this HR Guide to WOTC to learn more about the tax credit and our WOTC tips to integrate it into your hiring practices.
WOTC Guide: What is the Work Opportunity Tax Credit (WOTC)?
WOTC is a federal business tax credit for companies that hire and retain individuals from target groups, including veterans, SNAP benefits recipients, and ex-felons, among others. Target individuals are usually those who face significant barriers to obtaining employment.
The tax credit ranges from $1,200 to $9,600 per eligible employee, depending on the number of hours worked, the types of benefits the employee receives, and other factors. During the hiring process, employers will provide candidates with a form to help determine their eligibility for WOTC. Once the employee is hired, other forms will need to be completed and provided to the IRS within 28 days of the employee’s start date to obtain the credit. We’ll cover more details in later sections of this WOTC guide.
WOTC Tax Credit Amount
The actual WOTC amount you receive from each employee is equal to 25% to 40% of the employee’s wages. Also, the employee must work for a minimum of 120 hours (the equivalent of 3 full-time weeks) in order to receive any portion of the tax credit. Here’s a brief breakdown of maximum credit amounts:
Maximum Credit Amount
Long-Term Unemployed Individuals
SNAP Benefits Recipients
TANF Benefits Recipients
Supplemental Security Income Recipients
Summer Youth program participants, ages 16-17 who are employed between May-Sep 15 and live in a designated community area
Designated community residents
Vocational rehabilitation referrals
Long-Term Family Assistance recipients who are members of a family that has received TANF benefits for at least 18 consecutive months
Veterans with a service-connected disability and have been employed for 6+ months in the past year
Other veteran target groups
$2,400 - $5,600
The actual percentage is calculated based on the number of hours the employee works. For example, employers can receive a tax credit of 25% of the employee’s wages if they work at least 120 hours. That percentage increases to 40% if the employee works at least 400 hours. The main goal is to encourage businesses to hire and retain those who may struggle to gain employment. The more they’re allowed to work, the bigger the tax credit.
Use our WOTC calculator to see how much your business may be able to earn.
Who is Eligible for WOTC?
Many HR hiring systems have WOTC eligibility requirements built in. This takes much of the guesswork out of the process of determining whether an employee is eligible for WOTC, collecting the required details, and maintaining privacy and compliance.
WOTC Forms and Paperwork for HR
To receive all tax credits your business is eligible for, you will need to furnish the proper forms and paperwork to the IRS.
Page 1 of Form 8850 should be filled out by the candidate during the hiring process. Hiring managers can use this as a screening tool to see if a candidate might make your business eligible for a tax credit.
On the first day of your new hire’s employment, HR managers should fill out Page 2 of Form 8850, along with an ETA Form 9061 or 9062. These forms must be completed and submitted to the IRS within 28 days of your new hire’s start date.
For questions about filling out Form 8850, the IRS offers an instructional guide to ensure forms are filled out correctly and submitted in a timely manner. Otherwise, simple mistakes may affect your tax credit eligibility.
WOTC Tips: Count Every Credit!
WOTC is a win-win for employers in two ways: First, they are able to fill vacancies with qualified talent. And second, they lower their tax obligations in the process. And if you need a third reason, it also provides a much-appreciated work opportunity to someone in need.
Here are some of our top WOTC tips to maximize participation and increase your tax credit:
Explain the Role of WOTC
Filling out WOTC eligibility forms is optional for employees. However, keep in mind that many non-HR employees won’t understand what the WOTC program is or why they should participate. Explain that while participation is optional, it can provide great value to the company and ultimately to the organization’s workforce.
Make Form 8850 a Standard in Your Hiring and Onboarding
If your hiring system doesn’t already include WOTC forms and questions, consider ways to integrate these tools into the process. Make it part of your new hire paperwork so that you never miss an opportunity to increase your tax credit. Also, this ensures that all employees receive the form so that discrimination is never an issue.
Build Processes Around WOTC Collection and Submission
Claiming your company’s work opportunity tax credits is not a one-and-done deal. There are multiple steps involved with each eligible employee, including reviewing the answers on Form 8850, submitting your own forms in a timely manner, and tracking employee hours and wages. Missing just one of these crucial steps can disqualify you from the tax credit.
But when you build processes around WOTC, you may be less likely to skip important information and maximize your tax credit. HR tools like GoCo can automate and simplify many of the WOTC intricacies and supply you with all the paperwork and validation you need to claim your tax credits.
Want to see how much of a tax credit you might be eligible for? Use our WOTC calculator - it’s free!