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Are You Having Difficulty Attracting and Hiring Employees?
The Federal government provides tax relief to employers hiring and retaining employees. The credits reduce the cost of employees, allowing employers to offer higher wages to attract employees.
Today I would like to discuss the Work Opportunity Tax Credit (WOTC) and changes made for the economic impact of COVID-19.
The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment. Of particular interest as the COVID-19 extended unemployment benefits end are new hires who are Qualified Long-Term Unemployment Recipients
WOTC joins other workforce programs that incentivize workplace diversity and facilitate access to good jobs for American workers.
The Consolidated Appropriation Act, 2021 (Section 113 of Division EE P.L. 116-260) authorized the extension of the Work Opportunity Tax Credit (WOTC) until December 31, 2025.
Notice 2021-43, issued on August 10, 2021, provides transition relief for employers that hire certain individuals residing in empowerment zones by extending the 28-day deadline for employers who submit a certification request for an individual who begins work between on or after January 1, 2021, and before October 9, 2021.
The certification of an individual as a Designated Community Resident under § 51(d)(5), or as a Qualified Summer Youth Employee under § 51(d)(7), requires that the individual reside within an empowerment zone.
Targeted Groups
Employers can hire eligible employees from the following target groups for WOTC.
Designated Community Resident (DCR)
Vocational Rehabilitation Referral
Supplemental Nutrition Assistance Program (SNAP) Recipient
Supplemental Security Income (SSI) Recipient
Long-Term Family Assistance Recipient
Qualified Long-Term Unemployment Recipient
Pre-screening and Certification
An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work.
Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850.
Limitations on the Credits
The credit is limited to the amount of the business income tax liability or Social Security tax owed.
A taxable business may apply the credit against its business income tax liability, and the normal carry-back and carry-forward rules apply. See the instructions for Form 3800, General Business Credit, for more details.
For qualified tax-exempt organizations, the credit is limited to the amount of employer Social Security tax owed on wages paid to all employees for the period the credit is claimed.
Claiming the Credit
Qualified tax-exempt organizations will claim the credit on Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, as a credit against the employer’s share of Social Security tax. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return.
Taxable Employers
After the required certification is secured, taxable employers claim the tax credit as a general business credit on Form 3800 against their income tax by filing the following:
Your business’s related income tax return and instructions (i.e., Forms 1040 or 1040-SR, 1041, 1120, etc.)
Tax-exempt Employers
Qualified tax-exempt organizations described in IRC Section 501(c) and exempt from taxation under IRC Section 501(a), may claim the credit for qualified veterans who began work for the organization after 2020 and before 2026. After the required certification (Form 8850) is secured, tax-exempt employers claim the credit against the employer Social Security tax by separately filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.
File Form 5884-C after filing the related employment tax return for the period that the credit is claimed. The IRS recommends that qualified tax-exempt employers do not reduce their required deposits in anticipation of any credit. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return.
