How to Qualify for the Work Opportunity Tax Credit: A Step-by-Step Guide

March 16, 2023 Contributor

To help businesses recruit people from underrepresented groups, the federal government offers the Work Opportunity Tax Credit (WOTC). This credit can provide significant savings for eligible employers and improve their bottom line. However, navigating the WOTC process can be confusing, and many small business owners are unaware of the credit’s benefits. In this step-by-step guide, we will walk you through the process of qualifying for the WOTC. By following these steps, you can take advantage of this valuable tax credit and reduce your tax liability while providing employment opportunities for individuals in your community.

Step 1: Determine Eligibility Criteria

The first step to qualifying for the Work Opportunity Tax Credit (WOTC) is to determine if your new hires meet the eligibility criteria. The WOTC targets individuals from specific target groups who may face barriers to employment. The following is a list of the target groups eligible for the WOTC:

Temporary Assistance for Needy Families (TANF) recipients
Supplemental Nutrition Assistance Program (SNAP) recipients
Qualified veterans
Ex-felons
Designated community residents (DCRs)
Vocational rehabilitation referrals
Summer youth employees
People who receive Supplemental Security Income (SSI)
Long-term family assistance recipients

Each target group has its own eligibility requirements, and not all individuals within a target group will qualify. For example, to qualify as a qualified veteran, the individual must be a veteran who has been unemployed for at least four weeks in the year before being hired. It is important to review the specific requirements for each target group to determine if your new hire is eligible for the credit. Additionally, there are certain requirements for the job itself, such as the number of hours worked and the length of employment, that must be met to qualify for the WOTC.

Step 2: Obtain Pre-Screening Notice and Certification Request

Once you have determined that your new hire is eligible for the Work Opportunity Tax Credit (WOTC), the next step is to obtain the necessary paperwork to claim the credit. The first document you will need is the Pre-Screening Notice and Certification Request form, which is also known as Form 8850.

This form is used to collect basic information about the new employee and to certify that they belong to one of the eligible target groups. The form must be completed and signed by the employer and the employee no later than the day the job offer is made.

It is important to note that the Pre-Screening Notice and Certification Request form must be submitted to your state workforce agency within 28 days of the employee’s start date to be eligible for the credit. Therefore, it is important to complete this step as soon as possible after making the job offer to ensure that you do not miss the deadline.

Step 3: Complete and Submit IRS Form 5884

The next step in claiming the Work Opportunity Tax Credit is to complete and submit IRS Form 5884, also known as the WOTC Certification Form. This form is used to calculate the amount of the credit that you are eligible to claim.

In order to complete Form 5884, you will need the information from the Pre-Screening Notice and Certification Request form, as well as the employee’s start date and the wages paid to the employee during the first year of employment.

Once you have completed Form 5884, you should attach it to your business tax return when you file. The credit can be claimed on your annual income tax return using IRS Form 3800, which is the General Business Credit form.

It is important to keep accurate records of all paperwork and documentation related to the Work Opportunity Tax Credit in case of an audit by the IRS.

Step 4: Claim the Credit on Your Tax Return

The final step in claiming the Work Opportunity Tax Credit is to actually claim the credit on your business tax return. As mentioned earlier, the credit can be claimed on your annual income tax return using IRS Form 3800, which is the General Business Credit form.

On Form 3800, you will need to enter the amount of the credit you are claiming from Form 5884. The credit will then be subtracted from your tax liability, which can help to reduce the amount of taxes that you owe.

The Work Opportunity Tax Credit is a credit that can only be used to offset taxes owed and cannot be refunded under any circumstances. If the credit exceeds your tax liability for the year, any excess credit cannot be refunded or carried over to future years.

In addition, it is important to keep accurate records of all paperwork and documentation related to the Work Opportunity Tax Credit in case of an audit by the IRS. This includes the Pre-Screening Notice and Certification Request form, the WOTC Certification Form, and any other documentation related to the hiring and employment of eligible employees.

Step 5: Monitor Compliance

After you have claimed the Work Opportunity Tax Credit on your tax return, it is important to continue monitoring compliance with the program’s requirements.

This means ensuring that you are retaining all required documentation related to your eligible employees, such as the WOTC Certification Form and any other related paperwork. You should also ensure that you are following all applicable regulations related to the program, such as the program’s anti-discrimination provisions.

In addition, you should keep up-to-date with any changes or updates to the program, including changes in eligibility requirements or the amount of the credit.

By staying compliant and up-to-date with the program’s requirements, you can continue to claim the credit for eligible employees and receive the tax savings that the program offers. It is also important to note that noncompliance can result in penalties and other negative consequences, so it is important to take this step seriously.

Conclusion

The Work Opportunity Tax Credit can be a valuable tool for small businesses to save money on their taxes while also supporting the employment of certain eligible groups of workers. By following these steps, small business owners can better understand the requirements and application process for the credit, as well as best practices for claiming and monitoring compliance with the program. It is important to consult with a tax professional and stay up-to-date with any changes or updates to the program to ensure that you are maximizing your tax savings and remaining compliant with the program’s requirements.