Looking to hire a new employee? Consider using the WOTC program to lower your taxes. Here's how.
When it's time to hire a new employee for your company, you have an opportunity to qualify for a tax credit at the same time. The government offers several credits when you hire from groups that need help finding jobs, and the Work Opportunity Tax Credit program (WOTC) is one of the largest. Here's what you need to know before participating in the WOTC program.
1. Understanding Eligibility
Any business is eligible to participate in the WOTC program. And there's no limit to the number of people you can hire this way, which in turn means there's generally no limit to the amount of credits for which you may be eligible.
For a worker to be eligible under the WOTC program, they must be part of a target group from which the government is trying to encourage hiring. According to the Department of Labor (DOL), these groups include:
- Temporary Assistance for Needy Families (TANF) recipients
- Supplemental Nutrition Assistance Program (SNAP) recipients
- Designated Community Residents (living in Empowerment Zones or Rural Renewal Counties)
- Vocational Rehabilitation Referrals
- Supplemental Security Income (SSI) recipients
- Summer Youth Employees (living in Empowerment Zones)
2. Screening Applicants
Before an employer can hire someone under the WOTC program, the candidate must demonstrate their eligibility by filling out the first page of IRS Form 8850 and returning it to you, either on or before the job offer date. This form lists the conditions under which someone from one of these target groups qualifies for the program.
If you're struggling to find eligible applicants, try reaching out to your state's WOTC coordinator or local unemployment offices to see if they have programs that can introduce you to good candidates.
3. Filing Paperwork
After hiring an eligible employee, employers must complete Page 2 of Form 8850, which includes questions about your business's contact information and key dates for hiring the employee. You must submit the completed form to your state's workforce agency within 28 days of hiring the employee.
4. Claiming Your Credit
The total tax credit depends on the number of hours the eligible employee works during their first year of employment (and second year for TANF recipients), their total wages and the target group they came from. For all target groups other than long-term TANF recipients, the credit amound equals 25 percent of their wages if they work at least 120 hours, and up to 40 percent of their wages if they work at least 400 hours during the year, up to the tax credit maximum.
Your maximum tax credit ranges from $1,200 to $9,600 per eligible employeee, depending on the employee's target group. When you file your tax return, you must submit IRS Form 5884 to claim your WOTC credit.
It's wise to make copies of all documents submitted to each state workforce agency in connection with the WOTC program. You may need these documents if the IRS wants to verify that your business qualified for the credits it claimed on its tax returns. And you must track employee hours to ensure requirements were met and to calculate the eligible credit amount.
Finally, note that the WOTC program is scheduled to expire at the end of 2019, according to the IRS. Congress will need to renew the program for it to continue past that point. Until then, employers can continue to take advantage of this valuable program.
Read how ADP helped the Restaurant Management Company make the most of their WOTC screening.