Employers encouraged to certify employees for Work Opportunity Tax Credit

Editorial team of TFX

• 20.11.23 • 5 min read

The Internal Revenue Service (IRS) has recently issued a reminder to employers about the significance of certifying their employees before claiming the Work Opportunity Tax Credit (WOTC).

This tax credit serves as a beneficial incentive for companies to hire individuals from various groups that traditionally face obstacles in finding employment.

Certification process

Employers looking to claim the WOTC must first certify that the new hire belongs to one of the eligible groups. This is done by submitting IRS Form 8850 to their state workforce agency within a strict 28-day period following the employee's start date.

It's important to note that this form should not be sent to the IRS but to the respective state agency.

Claiming the credit

Post-certification, the WOTC can be claimed based on the wages paid to the new employee in their first year. The claim process involves using Form 5884 for the Work Opportunity Credit, which is then included in Form 3800, General Business Credit, on the federal income tax return.

Special rules for tax-exempt organizations

For tax-exempt organizations, there's a specific guideline that allows them to claim this credit only for hiring qualified veterans.

The credit for these organizations is claimed against payroll taxes using Form 5884-C.

Credit limitations

It's crucial for businesses to understand that the value of the credit they can claim is limited. For taxable businesses, it is capped by their income tax liability.

In contrast, for qualified tax-exempt organizations, the limit is set by the amount of employer Social Security tax owed on wages paid to the qualifying employees.

Useful advice

• Timeliness: Adhering to the 28-day deadline for Form 8850 submission is essential.
• Understanding Eligible Groups: Employers should familiarize themselves with the categories of workers eligible for WOTC.
• Record-Keeping: Maintaining accurate records of wages and employment dates is crucial for compliance.
• Professional Consultation: Employers are advised to seek advice from tax pros to fully understand and benefit from the WOTC, ensuring compliance with the tax laws.

Bottom line

The WOTC offers a valuable opportunity for employers to contribute to the workforce diversity while receiving tax benefits. 

By adhering to the IRS guidelines and deadlines, employers can effectively utilize this tax credit, supporting those in the workforce who face significant barriers to employment.