The Work Opportunity Tax Credit (WOTC) is a vastly under-utilized program. It is intended to provide equity to people who have faced barriers to traditional employment, including veterans, the formerly incarcerated, and the long-term unemployed. The WOTC provides an incentive to employers to hire and retain workers in these targeted groups by offering up to $9,600 in federal tax credits per eligible employee, with $2,400 being the most common amount claimed.
However, many employers often miss out on this valuable tax credit due to being unsure how to claim it, or the confusion and frustration that arises when doing WOTC paperwork that ends up nullifying the credit. Here’s what you need to know about claiming WOTC, and how to avoid common WOTC mistakes if you have eligible employees.
Mistake #1: Not Screening Employees
There are 10 distinct targeted groups for the WOTC, and the IRS provides an exhaustive list of them. This is one of the most common WOTC pitfalls because a prospective employee may be eligible, but they are either not screened or do not want to divulge details about their lives and finances to their employer if given a screening questionnaire.
This screening must occur during the job application process or on the day the offer is accepted.
The simplest way to be sure an employee is eligible for WOTC is if they are pre-certified by a designated local agency, like a state or county workforce development program or Vocational Rehab, and were referred to you through these programs.
If a prospective employee simply applies for your available jobs, you will need to check with the appropriate state authority to screen them for WOTC eligibility. Otherwise, you can miss out on a valuable tax credit.
Mistake #2: Missing the Filing Deadline
Unlike many business tax credits, which you only need to reference when you file your annual tax returns, claiming WOTC works a little differently.
There is a 28-day rule that the IRS enforces, although the WOTC form isn’t filed with the IRS. Employers must file IRS Form 8850 with their local state workforce agency (SWA) within 28 days of the employee’s hire date. The SWA needs to certify whether the employee is eligible for the credit. If you don’t have the certification, you cannot claim the credit, even if the employee was eligible.
Mistake #3: Incomplete or Incorrect Documentation
IRS Form 8850 is required for each eligible employee, and you must have your SWA certification to claim WOTC. While this step is crucial, it also isn’t the only one. Missing or incorrect paperwork is one of the most common WOTC mistakes.
In addition to Form 8850, each new hire also needs ETA Form 9061, Individual Characteristics Form. Long-term unemployment recipients have a different form, ETA Form 9175, and Job Corps and other agencies use ETA Form 9062. These forms must be completed and sent to your WOTC coordinator at your local SWA.
Check that each form has all required signatures and the dates match. Mismatched dates can cause bottlenecks or your application to be rejected entirely. Unverified eligibility also equates to losing out on WOTC.
Meticulously check all of your required forms before submitting them to the SWA, and ensure that you are within the filing deadline.
Mistake #4: Assuming Part-Time or Temp Workers Don’t Count
A common misconception about WOTC is that only full-time employees are eligible. While contract and freelance workers don’t count, workers don’t need to be full-time to qualify for WOTC. Some disadvantaged groups that face barriers to traditional employment, like disabled workers, often cannot work full-time due to limitations and/or risk loss of benefits. Even if you have WOTC hires just for seasonal, temporary, or part-time hours, they may still be eligible for the credit so long as they are in a targeted group.
WOTC is calculated as 40% of up to $6,000 of wages per eligible employee ($24,000 for certain veterans) provided that it is their first year of employment with you and they perform at least 400 hours of service during this first year. The WOTC rate drops to 25% of up to $6,000 of wages per eligible employee if they work less than 400 hours, but at least 120 hours, during their year of hire.
WOTC is based on the number of hours worked and being part of the targeted groups, rather than being conditional on the employment being full-time.
Mistake #5: Not Using Your Payroll Provider’s Support
WOTC is an extremely valuable tax credit, but one that is often rife with frustration since there are several additional steps that are not as straightforward as simply listing your business expenses when you file your tax return. When you work with a payroll provider like ASAP Payroll, we provide additional support to help you maximize wage-based tax credits that come with conditions like WOTC.
ASAP Payroll’s automated screening features, filing reminders, built-in compliance checks, and dedicated support provide you with additional layers of protection to ensure that you don’t lose several thousand dollars in tax credits. Our solutions help business owners like you save time and enhance compliance by reducing your error risk with our payroll automation tools.