Employers are facing new operational and financial challenges, including those related to recruiting and employee retention. Amid the Great Resignation, employees’ mindsets and priorities are changing. In January 2022 alone, nearly 3% of the total US workforce left their employment voluntarily. And for employers, the cost of wages, salaries, and their portion of employee benefits are on the rise. In the Northeast, as of December 31, 2021, the Employment Cost Index for total compensation rose by 4.2% compared to December 2020. But The Work Opportunity Tax Credit (WOTC) may help you hire the workers you need, expand diversity and inclusion, and provide significant tax savings.
The WOTC was established to foster diversity in the workplace and provide American workers with access to good jobs. Under the Consolidated Appropriation Act, 2021 (CAA), the WOTC is available through December 31, 2025. Employers who recruit qualified employees from the WOTC’s targeted groups could receive federal tax credits ranging from $1,500 to $9,600 for each qualified individual. The amount of the credit depends on the worker’s earnings and hours during their first year of employment and their category or demographic. In general, employers receive 25% of an eligible employee’s wages earned in the first year of employment if they work at least 120 hours and 40% if they work 400 hours or more.
WOTC Eligibility
Employers can claim the WOTC when they hire from targeted groups that face barriers to employment. While the WOTC is available to qualified for-profit businesses of all sizes, the credit is available to qualified tax-exempt organizations for new hires in the veteran target groups only.
Eligible employees include temporary, seasonal, part-time, and full-time new hires from qualified WOTC targeted groups, including:
- Individuals who were unemployed for 27 or more consecutive weeks before being hired and received unemployment during some or all of that time
- Individuals belonging to a family that received TANF for any nine-month period in the 18 months before being hired
- Individuals at least 18 years old and under 40 when hired who received, or are a member of a family that received, benefits through the Supplemental Nutrition Assistance Program (SNAP) for the previous six-month period or at least three of the previous five months
- Individuals who received Supplemental Security Income (SSI) for a month within the 60-day period before being hired
- Individuals with a mental or physical disability who are vocational rehabilitation referrals under an approved State plan, an Employment Network Plan under the Ticket-to-Work Program, or a program carried out under the Department of Veteran Affairs
- Veterans who received or belong to a family that received SNAP assistance for three months or more during the first 15 months of employment
- Veterans who were unemployed for at least four weeks (does not have to be consecutive) but less than six months in the year before being hired
- Veterans who were unemployed for at least six months (does not have to be consecutive) in the year before being hired
- Disabled veterans entitled to service-connected disability compensation who are hired within a year of being discharged or released from active duty in the US Armed Forces
- Disabled veterans entitled to compensation for a service-connected disability who are unemployed for at least six months (whether or not consecutive) in the year before being hired
- Individuals hired within a year of being convicted of a felony or being released from prison from the felony
- Individuals at least 18 years old and under 40 when hired who qualify as a Designated Community Resident (DCR) because they reside within an Empowerment Zone, enterprise community, or renewal community when hired and after employment
- Summer youth employees who are at least 16 years old but under 18 on the later of the date of hire or May 1st, are only employed between May 1st and September 15th, and reside in an Empowerment Zone, enterprise community, or renewal community
- Individuals who belong to a family that received long-term family assistance under an IV-A program for a minimum of 18 consecutive months before being hired, for an 18-month period that ended no more than two years ago, or until becoming ineligible within the last two years due to a federal or state law limiting maximum assistance
Relatives, dependents, majority company owners, and former company employees (unless summer youth employees) are not eligible.
WOTC Limitations
For businesses, the WOTC is limited to the amount of the company’s income tax liability (normal carry-back rules apply) or Social Security tax owed. For tax-exempt organizations, the credit is limited to the amount of employer Social Security tax owed on wages paid to all employees for the tax year.
Employers can not claim the WOTC against wages used to calculate and other employee-based tax credits, such as the Employee Retention Credit (ERC), Employer-Paid Family and Medical Leave Credits, or Paycheck Protection Program (PPP) loan forgiveness.
WOTC Pre-Screening & Certification
So how do you vet, connect with, certify, and hire individuals within these targeted groups? First, don’t panic… the Equal Employment Opportunity Commission (EEOC) ruled that pre-screening for WOTC purposes is not discrimination, so this won’t be an HR nightmare. So you can ask the screener questions to qualify your applicants or new hires as part of the application or onboarding process. It’s also perfectly fine to choose an individual who is more likely to have a difficult time finding work over an individual with more training or education. That’s the whole point of the WOTC. Because the government is paying the benefits that make these groups eligible, they want employers to choose these individuals first. The WOTC process can vary by state, so employers should contact their respective state workforce agency (SWA) ahead of claiming the credit.
In general, before or on the day you make a job offer, you will need the individual to complete page one of IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. If you hire the employee and believe they qualify for the WOTC, you will need to complete page two no later than the date of hire.
Unless the new hire provides you with a DOL ETA Form 9062, Conditional Certification Form, completed by a participating agency, SWA, or vocational rehabilitation agency, you will also need to complete DOL ETA Form 9061, Individual Characteristics Form (ICF) Work Opportunity Tax Credit. Regardless of the form number, employers must submit the DOL form with supporting documentation and IRS Form 8850 to their respective SWA within 28 days of the employee’s hire date to claim the WOTC. The SWA must send you its determination that the employee is qualified before you can claim the WOTC.
Employers should maintain up-to-date, comprehensive records on wages and hours worked. You may only claim the WOTC for a qualified employee after the employee has worked for at least 120 days. To claim the WOTC, a business would include Form 5884, Work Opportunity Credit, when filing its tax return. However, a tax-exempt organization would file Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, separately (not with its tax return).
Claiming the WOTC in Maine
Maine employers can create a self-service account with Maine CertLink, which allows users to submit WOTC certification applications, upload supporting documentation, monitor application status, print certificates and letters, and perform bulk submissions and other actions. Maine’s SWA is the Maine Department of Labor located at 55 State House Station, Augusta, ME 04333-0055.
Maine CareerCenter Veterans’ Representatives work to connect local employers and veterans looking for good jobs. Employers should contact a local CareerCenter Veterans’ Representative for more information. Contact information for these representatives is listed by region on Maine’s CareerCenter website. For businesses in the Greater Portland area, the representatives are Mark Cafiso (207-822-3344 / Mark.J.Cafiso@maine.gov) and Allen Blackstone (207-822-3352 / Allen.Blackstone@maine.gov).
The Maine DOL Bureau of Rehabilitation Services (BRS) works to connect businesses with individuals with disabilities seeking employment. BRS also provides businesses with nationwide resources and can connect you with other Maine-based businesses that hire people with disabilities to share their experiences. For more information, employers should contact Business Relations Specialist Darcy Brockman at darcy.brockman@maine.gov.
Contact ARB
ARB’s Business Tax & Advisory Services Teams are here to help. We help employers understand their options based on eligibility, navigate federal and state requirements, and claim the WOTC. Contact me today to learn more or if you’d like to discuss your company’s other tax, accounting, or business advisory needs.
by David Jean, CPA, CCIFP, CExP
David Jean is a principal at ARB and the Practice Leader for the firm’s Construction & Real Estate, Succession Planning, Professional Services Firms, and Business Advisory Services Teams. He provides specialized tax, accounting, and business advisory services primarily to construction, real estate, and manufacturing companies. David is a member of the NASBP’s CPA Advisory Council. As a Certified Exit Planner and the Director of Altus Exit Strategies, David helps business owners create, implement, and execute successful succession and exit plans
