July 14, 2021

Take a tax break for hiring the unemployed

Did you know you could receive a tax break for hiring unemployed individuals? The Work Opportunity Tax Credit (WOTC) is a federal tax credit for hiring applicants from certain target groups who face significant barriers to employment—including individuals unemployed for 27 weeks or longer.

With 9.5 million unemployed Americans in June, according to the Bureau of Labor Statistics, now is the time to take advantage of this hidden gem. The credit can help offset the cost of turnover and cover recruitment incentives, like hiring bonuses.

Employers claim about $1 billion in tax credits each year under the WOTC program—but there’s a lot of cash left on the table by owners unaware of the credit. Here are some FAQs about the WOTC.

Who qualifies? To qualify, a new hire must fit into one of the target groups identified by the U.S. Department of Labor, which includes long-term unemployment recipients and food-stamp recipients. For a complete list, see here.

A new hire must work a minimum of 120 hours during the first year of employment for the employer to receive a credit. Owners can receive a tax credit for each eligible hire; there’s no limit.

Can I receive a credit for rehiring an individual I laid off during the pandemic? Unfortunately, no. “If someone has worked for you in the past, you don’t get a second bite at the apple,” says Natalie Commons, WOTC consultant for Tri-Merit specialty tax professionals.

How much of a tax credit can I receive? You can earn a maximum credit of $2,400 for each employee on long-term unemployment at the time of hire. Employers earn a credit equal to 25% of the employee’s wages if the staffer works at least 120 hours in the first year and 40% if the individual works at least 400 hours—up to the $2,400 cap. So, there’s a perk for retaining employees. Some targeted categories offer a larger credit, with the highest being $9,600 for hiring a disabled veteran.

How do I apply for a tax credit?

1. Prescreen applicants. Individuals can fill out IRS Form 8850 directly on paper/PDF, or they can complete and sign a screening questionnaire electronically, often through an applicant tracking system or an onboarding platform.

Employers can’t require individuals to answer the qualifying questions, but voluntary participation is high when the process is incorporated into hiring procedures, says Commons.

The screening questions are compliant with Equal Employment Opportunity laws, so you can use the information to tip the scales in your hiring decisions. The program’s intent is to give employers “an incentive to take a chance on somebody who has struggled,” says Commons.

2. Submit certification information ASAP. Submit Form 8850 and other required information to your state workforce agency within 28 calendar days of the new hire’s start date. Include ETA Form 9061 or Form 9062; this information can also be gathered along with the Form 8850 details through a one-stop process using an electronic questionnaire. When hiring unemployed applicants, include ETA Form 9175, Long-Term Unemployment Recipient Self-Attestation Form. Many states will notify you if an employee is certified within five months, but some take two years or longer, Commons notes.

3. Claim your tax credit. Track the hours and wages of employees that your state certifies as WOTC eligible. You’ll need this information to claim your tax credit using IRS Form 5884 and IRS Form 3800. Consider outsourcing your WOTC administration. Some tax professionals, like Tri-Merit, offer contingency-based fees, where you pay nothing until you receive a tax credit.

Check with your tax professional whether your state offers any “piggyback” tax credits, recommends Barry Devine, Tri-Merit’s WOTC director. Qualifying for a WOTC credit may make you eligible for a credit on your state taxes.

Disclaimer: This content is for informational purposes only, and should not be used as legal, tax, investment, financial, or other advice. This information is of a general nature and does not address the circumstances of any particular individual or entity. The document does not constitute professional and/or financial advice, nor does any information constitute a comprehensive or complete statement of the matters discussed or the law. The reader of the document alone assumes the sole responsibility of evaluating the merits and risks associated with the use of any information before making any decisions based on such information.