The Work Opportunity Tax Credit: A win-win for business owners and disabled workers

Tax Law and News Work Opportunity Tax Credit

Did you know the Work Opportunity Tax Credit (WOTC) could save your clients thousands of dollars and employ a largely overlooked workforce?

Consider introducing your clients to an underemployed group of people. There’s no doubt that business owners want hard working, dedicated employees who contribute to the company’s bottom line and to a positive work culture. By hiring some of these folk, not only would your clients take a step closer to a more diverse workforce, but they would also realize significant tax savings. Even nonprofits that are not subject to normal business income taxes can reap the benefits.

Meet Ben

Ben - Work Opportunity Tax CreditBut first, let me tell you about Ben, the best tennis team member I ever had. I coached high school tennis for many years, and in that time, I coached a lot of great players who were district champions, collegiate scholarship winners, and state semifinalists; in a tennis-crazy state such as Florida, that’s a big deal. Ben wasn’t a great player. In fact, he wasn’t a player at all. Ben was my team manager.

For those not in the know, team managers have a pretty big and mostly thankless job. They’ve got to haul all of the equipment, shag balls, help set up the courts prior to matches, and generally be at the beck and call of the coach every moment. However, Ben shone in the role. He never missed a practice, never complained, had unflagging team spirit, and did everything he was asked with a smile and a cheerful, “Okay, Coach!”

Ben’s attitude, work ethic, and love of the game rivaled my best players. His presence added to the team in unquantifiable ways. He had those intangible qualities coaches look for that help teams gel from a collection of individuals to a seamlessly functioning, well-oiled machine. Oh, and one more thing: Ben had trisomy 21, also known as Down’s Syndrome.

There are thousands of people just like Ben, waiting to bring to your clients the work ethic, good cheer, and joy he brought to our tennis team. Hiring them can benefit company culture and the bottom line, and they can be found as a referral from a state vocational rehabilitation (VR) program. VR invests significant resources into helping these potential employees ready themselves to do jobs for your clients, from paying for additional education to providing specialized training and/or job coaches, to paying for expensive equipment that will enable disabled applicants to have access to your clients’ jobs.

Other potential hires who qualify for the credit include certain lower-income individuals, qualified veterans, and ex-felons. It’s even possible that your clients have already hired someone who qualifies, so be sure to include reminding them to check as part of your tax planning guidance. In fact, many people who have been on unemployment assistance as a result of COVID-19 will qualify for this program.

How the credit works

The WOTC is available to employers who hire individuals who have historically faced significant barriers to employment; the IRS includes a comprehensive list of targeted groups on their WOTC page. To access the credit, an employer must first get certification that the prospective or new employee (hired within the last 28 days) is a qualified member of the target group by submitting Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to their state’s workforce agency. Imagine how grateful your clients will be for a phone call advising them of these huge possible tax savings!

Once the employee is certified as qualified, claiming the credit is relatively straightforward, but does require some calculations, and how to do it depends on the type of organization. Tax-exempt organizations may claim the credit against the employer’s share of the Social Security tax on Form 5884, Work Opportunity Credit. Taxable employers claim the credit as a general business credit against their taxable income by filing Form 3800, General Business Credit.

How much is the credit worth? That’s where the calculations come in. Depending on the qualifying individuals and their work hours, the credit can be worth up to $9,600 per employee. It is calculated as a percentage of each qualified employee’s wages, but employees must have worked at least 120 hours to generate the credit. The credit is not refundable; it won’t generate a refund once the tax liability is reduced to zero. However, for taxable businesses, the normal carryback and carryforward rules apply.

For qualified tax-exempt organizations, there is no carryforward; the credit is limited to the Social Security tax owed on wages paid for the period claimed. Intuit® ProSeries® Tax and Lacerte® Tax will calculate the credit for you and generate both forms.

With the WOTC, you can help your clients benefit from reduced tax liability by being good citizens. Check it out today.

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