Here at the Tax Credit Group, we spend a lot of time talking about the Work Opportunity Tax Credit, also known as the WOTC, and what it does. We talk about it so much that it often gets ingrained in our speech and we sometimes forget that other people don’t know what it is or what it means.
What is the Work Opportunity Tax Credit (WOTC)?
The WOTC is a tax credit that’s given to employers for hiring employees from specific groups such as veterans, ex-felons, people on food stamps, and the long-term unemployed.
The IRS has a whole list of people who qualify for the WOTC and if you want to take a look just click here.
WOTC Form 8850
To claim someone as a WOTC, you first have to have that person screened by the IRS. That’s why you’ll hear the term Form 8850 a lot. It’s the form you must fill out and file with the IRS so that the agency can approve or deny your plans to claim an employee as a tax credit.
You must get this done quickly. The IRS has a time clock on this kind of paperwork. You have 28 days from the employee’s first day of work to file the Form 8850 with the employee’s “state workforce agency”.
Is the WOTC tax credit refundable?
In a previous post, we talked about the difference between a tax credit and a tax deduction. When it comes to a tax credit, if you have enough of them, they can drop the amount of money that you owe to the IRS below zero. This means the IRS could owe you a refund.
The Congressional Research Service lays out all the details, but the bottom line is that the WOTC is non-refundable except in certain, very specific circumstances. Non-refundable means that once you hit zero with your tax bill, that’s it for the year.
WOTC Form 5884-C
Now the one exception is that certain tax-exempt employers can receive a refundable WOTC. If you do, then you’ll need Form 5884-C.
If you think you’re in that situation, you should contact your CPA for clarification or us here at the Tax Credit Group.
Carrying forward the WOTC
While you cannot go below zero, you can carry the WOTC back one year on your taxes or forward up to 20 years according to the Tax Foundation. That means if you drop your taxes owed down to zero in one year and use the rest of the credit for the next year’s taxes. That can continue until you use all the tax credits or hit the 20-year mark.
Does WOTC benefit the employer?
The financial benefit of the WOTC varies depending on the employee and how many hours the employee works in his or her first year of employment.
According to the Tax Foundation, “The size of the tax credit is 25 percent of the qualified employee’s first year wages if the employee works between 120 and 400 hours of that year. This grows to 40 percent of the employee’s first year wages if the employee works more than 400 hours of that year.”
This is per employee, so if you employ multiple people that qualify for the WOTC, you stand to see a substantial credit.
The IRS caps the amount of WOTC a company can claim, and it varies depending many different factors. Be sure to check with your CPA or reach out to us if you’re not sure.
The other benefit that a company can receive from the WOTC is the piggy-back credit. We talk about WOTC piggy-back credits in a previous blog post, but the basic idea is that states also offer WOTCs for state taxes. Sometimes all it takes is applying to the federal program to qualify for the state benefits as well.
Does WOTC benefit the employee?
When it comes to taxes, the WOTC doesn’t benefit the employee, just the employer. The employer is the only one that gets to claim the tax credit.
However, the WOTC still benefits employees. An employer looking to use the WOTC they start actively seeks out employees who fall into one of the categories designated by the IRS. That’s the whole point of the WOTC, to get some of the underemployed workforces such as veterans and ex-felons, employed.
What the WOTC does is offer more and more diverse employment opportunities to key groups.