Tax Credit Opportunity: Earn Credits for Hiring Certain Employees

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Tax Credit Opportunity: Earn Credits for Hiring Certain Employees

Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers for hiring individuals from certain targeted groups who face significant barriers to employment.  

The WOTC was created in 1996 and joins other workforce programs facilitating jobs for American workers. The WOTC has been repeatedly renewed over the years. Under current law, employers will be able to take advantage of the WOTC through 12/31/2019.

How does WOTC work?

An employer will ask a newly-hired employee to voluntarily complete two forms. The IRS Form 8850 Pre-Screening Notice and Certification Request for the Work Opportunity Credit as well as the Department of Labor Form ETA 9061. Additional supporting documentation may need to be attached to the Department of Labor Form ETA 9061 to verify the employee belongs to one of the targeted groups. Once these two forms are completed and supporting documentation from the employee received, they are submitted electronically or by mail to the Arkansas Department of Workforce Services (ADWS) for verification and certification. Once the ADWS reviews and approves the forms, they will issue a certificate to the employer. When the employer receives a certificate for the newly hired employee, they are allowed to claim a WOTC on their federal income tax return.

It is important for employers to remember the 28 day rule. An employer has 28 days from the date an employee is hired to submit Form 8850, Form ETA 9061, and the supporting documentation to the ADWS.

How does the WOTC impact a business’ tax liability?

The WOTC is a dollar-for-dollar reduction of an employer’s Federal income tax liability. The credit is calculated on Form 5884 and reported as a general business credit on Form 3800. For employers organized as flow-through entities, S-Corp’s and partnerships, the WOTC is reported on the shareholder or partners’ K-1 and is claimed on their Federal individual income tax return. Tax-exempt organizations may also claim the credit, but only for hiring certain veterans.

Are there limitations to the credit?

The normal tax credit carry-back and carry-forward rules apply. Employers generally can earn a tax credit equal to 25% or 40% of a new employee’s first-year wages, up to the maximum for the target group to which the employee belongs. Employers will earn 25% if the employee works at least 120 hours during their first year and 40% if the employee works at least 400 hours during their first year. Employers can earn a tax credit up to $9,600 per employee, depending on the new employee’s target group and number of hours worked in their first year.

Who qualifies as a member of a targeted group?

  • Certain veterans
  • Certain ex-felons
  • Supplemental Nutrition Assistance Program (SNAP) recipients
  • Supplemental Security Income (SSI) Recipients
  • Long-term unemployment recipients (27 consecutive weeks or more)
  • Temporary Assistance for Needy Families (TANF) recipients
  • Certain Federal Empowerment Zone residents and Rural Renewal County residents
  • Vocational rehabilitation referrals
  • Certain summer youth employees

For questions about the Work Opportunity Tax Credit or other tax services, please contact Landmark Tax Manager Mark Greco at 479.636.4461.