Seize the Work Opportunity Tax Credit Before 2025 Expiration!

The Work Opportunity Tax Credit (WOTC) stands as a pivotal means for employers to achieve substantial tax savings while fostering employment for targeted groups historically facing employment barriers. With the credit set to expire on December 31, 2025, without further legislative action, now is the last chance for businesses to maximize its advantages. This article explores the detailed framework of the WOTC, encompassing qualifications, target groups, eligible working hours, and essential certification procedures that employers must understand to reap these tax benefits effectively.

Comprehending the Work Opportunity Tax Credit: The WOTC serves as a federal incentive for employers hiring individuals from specific groups facing significant employment challenges. This initiative is geared towards diversifying and strengthening the workforce by encouraging businesses to hire these individuals. To qualify under the current statute, employment must commence before January 1, 2026.

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Eligible Target Groups: The WOTC primarily targets various groups, including:

  1. Veterans: Special emphasis is placed on those unemployed for four weeks or more, or service-connected disabled veterans.

  2. Long-term Unemployed: Individuals out of work for 27 consecutive weeks or more.

  3. Ex-Felons: Individuals finding employment challenging due to past convictions.

  4. SNAP Recipients: Those who have received food stamps within the past six months.

  5. TANF Recipients: Individuals who have received assistance in the last two years.

  6. Designated Community Residents & Summer Youth Employees: Persons aged 18 to 39 residing in Empowerment Zones.

  7. Vocational Rehabilitation Referrals: Individuals with disabilities referred through a rehabilitation agency.

The key is ensuring these individuals are hired before the prescribed deadline, despite past Congressional tendencies to extend the credit.

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Credit Amounts and Parameters: The WOTC allows employers to claim a credit on a portion of the wages paid to eligible employees. The credit amount varies depending on the target group and hours worked:

  • General Rule: Up to 40% of the initial $6,000 paid to or incurred on behalf of the employee, amounting to a $2,400 maximum credit per employee.

  • Veterans: For disabled veterans, the credit could escalate to $9,600 given certain conditions are fulfilled.

  • Long-term Unemployed: Credits can be substantial, potentially approximating up to $5,000.

To qualify, employees must work a minimum of 120 hours. If over 400 hours are worked, employers can claim the full 40% of first-year wages. For those working between 120 and 399 hours, the credit rate reduces to 25%.

The Certification Pathway: Securing the WOTC involves navigating certification through the State Workforce Agency (SWA). Employers must submit IRS Form 8850 alongside the Department of Labor’s ETA Form 9061 or 9062 within 28 days from the eligible employee’s start date.

Expedited Certification for Veterans: The process is typically streamlined for veterans, reflecting a national priority on veteran employment, facilitating swift eligibility determinations for quick access to hiring benefits.

Limitations of the Credit: Some restrictions apply to the WOTC:

  • Relatives and Dependents: Employers cannot claim a credit for hiring spouses, children, or any dependents.

  • Business Owners: Business owners cannot claim a credit for hiring themselves or major stakeholders.

  • Federal Subsidized Programs: Wages under particular federal subsidized programs are not WOTC eligible.

Tax-Exempt Employer Considerations: Tax-exempt organizations, including 501(c) entities, can benefit from the WOTC but only apply the credit to hiring qualified veterans and offset employer Social Security tax.

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Urgency to Capitalize: With the sunset approaching on December 31, 2025, employers should act swiftly to capitalize on the WOTC. Although Congress has historically extended the credit, relying on such extensions isn't advisable given the current lack of action.

Employers looking to optimize their tax positioning while making impactful hiring decisions should prioritize understanding and utilizing the WOTC. The time-sensitive nature of this credit demands prompt action to ensure compliance with the necessary documentation, guaranteeing the advantage of this significant and soon-to-expire tax incentive.

For guidance on how the WOTC can benefit your business, contact our office today.

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