Could the work opportunity tax credit benefit your small business?

Not taking advantage of an available tax credit is akin to leaving money on the table. Unfortunately, we see this all too often, especially when it comes to busy small business owners and the work opportunity tax credit (WOTC).

This lesser-known federal tax credit is available to employers of any size that hire individuals who have consistently faced barriers to securing employment (i.e., within certain target groups). In other words, it’s a win-win for all.

Here’s what you should know about the WOTC.

Who’s eligible for the WOTC?

Any employer of any size that hires individuals within 10 target groups can be eligible for the WOTC. The target groups include qualified veterans, qualified ex-felons, and qualified summer youth employee, to name a few. The credit is available for wages paid to these individuals who begin work on or before December 31, 2025.

A full listing of the targeted groups is available on the IRS website. 

How does the WOTC work?

The WOTC is equal to 40% of up to $6,000 wages paid or incurred; the maximum credit is $2,400 per employee. However, there are a few stipulations to note. For an employee’s wages to be fully available for the credit, the employee must be:

• In their first year of employment
• Certified as a member of an eligible target group
• Working at least 400 hours of service for your business (a 25% rate applies to wages for individuals who have 120 to 399 hours of service)
• A new hire (i.e., not a re-hire)

If your business is taxable, you can claim the credit against your income taxes. If it’s tax-exempt, you can claim the credit only against payroll taxes—and only for wages paid to qualified veterans.

Of course, if you owe any business income tax or Social Security tax, your credit will be limited by these amounts. Any unused credit will be subject to the typical carry-back and carry-forward rules.

How can you claim the credit?

Claiming the credit requires a little extra paperwork when you onboard an employee from a targeted group. You and the employee must complete IRS Form 8850 (tax-exempt employers file Form 5884-C) and submit it to the State Workforce Agency within 28 days of the new employee’s start date.

Don’t leave money on the table!

If you think your business could be eligible for the WOTC, don’t let this tax-savings opportunity pass you by. We at Froehling Anderson are here to answer your questions and can help you determine precisely how the WOTC could benefit your business. We can even guide you through the filing process and to make sure you make the most of what could be a valuable benefit.

Reach out to  Joe Rubenstein, CPA with any questions.