While the employee retention credit (ERC) is no more, there’s still a significant tax credit on your side when hiring great workers from demographics that have historically faced significant barriers to employment: the federal Work Opportunity Tax Credit (WOTC).
Staffing shortages over the past few years may have you thinking outside the box. In today’s tight labor market, WOTC can be a valuable tool in your financial toolbox. The program incentivizes hiring individuals from targeted groups who face employment barriers. These groups include veterans, long-term unemployed individuals, recipients of government assistance, ex-felons, and individuals residing in empowerment zones (you can access the complete list of targeted groups here). WOTCs for new hires peaked in 2022 with more than 2.5 million certificates issued by state workforce agencies.
By hiring qualified individuals from WOTC targeted groups, your business may be able to claim tax credits that can significantly reduce your federal tax liability. The credit amount varies based on the particular group and earned wages, ranging from 25% to 40% of the first $6,000 for each qualified employee. These individuals must:
- Be in their first year of employment.
- Be certified as being a member of a targeted group.
- Perform at least 400 hours of services for that employer.
Given those parameters, as the IRS explains here, the maximum tax credit is generally $2,400. The 25% rate applies to wages for individuals who work fewer than 400 but at least 120 hours for the employer. Up to $24,000 in wages may be used to determine the WOTC for certain qualified veterans.
While the tax credit is certainly noteworthy, the WOTC offers additional benefits for employers. Research from Equifax Workforce Solutions shows WOTC-eligible employees:
- Stay in their jobs for the same length of time or longer as non-WOTC hires.
- Are less likely to leave their job in the first year than their cohorts.
- Progress through the ranks at the same pace and earn as much during that time as traditionally hired co-workers.
By employing individuals facing employment hurdles, you also contribute to your community’s economic and social well-being, enhancing your company’s reputation and fostering goodwill.
The WOTC application process may appear complex, but numerous resources are available to assist you, including from the Department of Labor and the IRS. Additionally, many state and local workforce development organizations (including the Texas Workforce Commission) can assist with the WOTC application process. These organizations can help determine your business eligibility, identify qualified candidates, and even assist with completing the necessary paperwork.
One recent change for Texas employers to note: Effective February 20, 2024, the IRS 8850 and ETA 9061/9062 must be submitted within 28 days of the start date for WOTC-eligible employees. It’s vital to consult with a qualified tax professional to discuss your specific circumstances and any law changes you may have missed and to determine if the WOTC program is right for your business. Feel free to contact us with questions.