Over the past two years, the Employee Retention Credit (ERC) has dominated the headlines in terms of federal tax credits, in particular for the restaurant industry. Now it’s time to turn the focus back to another valuable tax credit, the Work Opportunity Tax Credit, also called WOTC.
What is the WOTC?
The WOTC is a federal tax incentive program available to employers hiring individuals from specific targeted groups who face barriers to employment. Those targeted groups include qualified veterans, ex-felons, long-term unemployment recipients and SNAP recipients. The Consolidated Appropriations Act, 2021 extended the WOTC until December 31, 2025.
The WOTC is generally equal to 40% of an employee’s first-year wages capped at $6,000 if they are certified by the applicable state agency. To receive maximum credit, an employee must perform at least 400 hours of service in their first year. The maximum tax credit per employee is generally $2,400, but hiring from certain targeted groups can increase the credit to up to $9,600 per new hire. As a business hires more employees from targeted groups, the total credit can add up quickly.
Which industries may benefit from WOTC?
The WOTC can be very impactful in certain industries that tend to hire a significant number of employees or that experience higher levels of employee turnover; the restaurant industry has historically generated substantial WOTC credits.
How is the WOTC claimed by the employer?
Both for-profit and certain nonprofit employers of all sizes can be eligible for the WOTC. For-profit employers claim the WOTC as a general business credit on their income tax returns. Eligible non-profit employers claim the credit against the employer’s share of Social Security tax paid.
What does an employer need to do to start claiming the WOTC?
To claim the WOTC, an employer and a job applicant must first complete Form 8850, the WOTC pre-screening form. On September 19, 2022, the IRS updated guidance regarding the pre-screening and certification process. In this updated guidance, the IRS clarified that to satisfy the requirement to pre-screen a job applicant, a pre-screening form must be completed by the job applicant and the employer on or before the day a job offer is made. Once the employee begins work, the employer has 28 calendar days from the new employee’s start date to submit Form 8850 to the applicable state agency for WOTC certification.
Why WOTC and why now?
The WOTC is a beneficial program because it incentivizes workplace diversity and facilitates access to good jobs for many workers. Further, it allows businesses to generate valuable tax credits to help lower their tax liabilities. Now that many businesses, including restaurants, have claimed the ERC, they are looking for additional ways to save money that can be reinvested into their businesses. As a result of COVID’s impact on the workforce, many restaurants are looking to hire new employees, and the WOTC is an easy way to generate tax credits in the process.
Please reach out to Sara Goldhardt or your GBQ advisor if you have questions or want to learn more about the WOTC.
Article written by:
Sara Goldhardt, CPA
Director, State & Local Tax Services