The Federal Work Opportunity Tax Credit (WOTC) is a valuable tax incentive program designed to encourage employers to hire individuals from specific targeted groups who typically face barriers to employment. While the primary benefit of this program is the tax credit employers can claim, it also offers tax-exempt benefits to further enhance the financial advantages for both employers and eligible employees. In this blog post, we will explore the tax-exempt benefits associated with the WOTC program and how they can be maximized.
What is the WOTC credit?
Before we can get into the details of the tax-exempt benefits of the program, we need to develop a basic understanding of how the WOTC program works. Employers who hire individuals from target groups, such as veterans, the long-term unemployed, and recipients of certain public assistance programs, can claim a tax credit ranging from $1,200 to $9,600 per qualified employee. This credit is a dollar-for-dollar reduction of an employer's federal income tax liability.
Tax-Exempt Benefits
In addition to the tax credit, WOTC also offers tax-exempt benefits that can further enhance the financial advantages of employers. These benefits include:
- Payroll Tax Savings: Employers can exclude wages paid to qualified employees from their federal payroll taxes, including Social Security and Medicare taxes. This exemption can result in significant savings for employers by reducing their overall labor costs.
- Increased Cash Flow: By reducing payroll taxes, employers can improve their cash flow, allowing them to allocate resources to other areas of their business or invest in growth opportunities.
- Reduce Unemployment Insurance Costs: Some states offer employers a reduction in their unemployment insurance tax rates for hiring individuals eligible for WOTC, which can lead to substantial savings in UI costs over time.
It should be noted that tax-exempt employers are only allowed to take credit on individuals who fall into the qualified veteran group.
Maximizing Tax-Exempt Benefits
To maximize the tax-exempt benefit associated with WOTC, employers should consider the following strategies:
- Timely Submission of Form 8850: Employers have twenty-eight (28) days from a qualified employee's start date to submit Form 8850, also known as the Pre-Screening Notice and Certification Request for WOTC. Ensuring timely submission of this form is crucial to claim both the tax credit and tax-exempt benefits.
- Educating HR and Hiring Managers: HR and hiring managers should be educated about the WOTC program and the tax-exempt benefits it offers. This knowledge can help them identify eligible candidates and streamline the certification process.
Conclusion
The Federal Work Opportunity Tax Credit (WOTC) provides employers not only with a valuable tax credit, but also tax-exempt benefits that can further enhance their financial advantages. By understanding and maximizing these tax-exempt benefits, employers can reduce labor costs, improve cash flow, and potentially qualify for reduced insurance costs.
The WOTC program requires a great deal of administrative work, which in most cases exceeds the bandwidth of most HR departments. This is where A&M comes in. We have developed our own secure, proprietary software that takes the administrative burden off your organization's HR department. We screen every candidate, track their responses, file the necessary paperwork with the state agencies, and calculate the credit when it is time to file your tax return. In addition, we will provide frequent reporting, enabling you to track your program's success in real time. If you would like to learn more, please reach out and schedule a call with one of our WOTC professionals.
Originally published 5 November 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
