The Work Opportunity Tax Credit (WOTC) can serve as a viable tool to many businesses as they continue to recover and reopen their doors. While restaurants, hotels, distributors and many other retail businesses in particular had to reduce their workforce to stay afloat throughout the pandemic, programs like the WOTC could provide these companies further relief by offsetting federal income taxes imposed on them. With its recent extension through the Consolidated Appropriation Act, businesses can now expand their search for employees while taking advantage of this credit up to the end of 2025.
The WOTC is an established federal program that provides a federal income tax credit to employers hiring individuals from targeted groups that have historically faced significant barriers to employment. These groups include but are not limited to:
- Long-term unemployment recipients of more than 27 weeks
- Supplemental Security Income (SSI) recipients
- Designated Community Residents
While the credit amount varies based on the targeted group and the amount of hours worked by the hired employee, most businesses will receive a maximum of $2,400 tax credit per person under the WOTC program. The tax credit for most targeted groups equals 40% of the first $6,000 of wages that’s paid to an eligible person. Note that the WOTC-certified employee must work at least 120 hours during their first year of employment for the employer to claim the credit.
To apply for the WOTC, both the employer and the applicant must file IRS Form 8850 along with the U.S. Department of Labor’s Employment and Training Administration Forms 9061 and 9175. These forms should be filed within 28 calendar days of the new employee’s start date and can be submitted to your State Workforce Agency (SWA). Once the certification process has been completed, employers can file Form 5884 with their federal tax return to claim the credit.
While the WOTC can provide a significant tax break, keep in mind that there are other COVID relief programs available that may offer a larger tax benefit. Since benefits from these programs depend on payroll (i.e. PPP loan forgiveness and the employee retention tax credit), companies will have to allocate those wages to the specific programs to avoid receiving a double benefit.
Our tax specialists are also available for consultation on the WOTC for restaurants, hotels, distributors and retail businesses. Please contact Aaron Boker or one of our hospitality tax advisors at 301.231.6200 for more information.