The Work Opportunity Tax Credit (WOTC) is a valuable incentive for small business owners who hire employees from certain target groups, such as veterans, ex-felons, and individuals receiving government assistance. While the credit can be a significant benefit for small businesses, claiming it can be a complex process.
Accurate documentation and following best practices are crucial to ensure that small business owners can claim the credit successfully.
In this blog post, we’ll cover the best practices for claiming the Work Opportunity Tax Credit, including identifying eligible employees, completing the required paperwork, knowing the deadlines, consulting with a tax professional, monitoring the hiring process, and common pitfalls to avoid.
By following these best practices, small business owners can maximize their chances of successfully claiming the credit and reap the benefits of this valuable incentive. Let’s get started!
Identify Eligible Employees
The first step to claiming the Work Opportunity Tax Credit is identifying which employees are eligible for the credit. The credit is available to employers who hire individuals from certain targeted groups, including:
- Temporary Assistance for Needy Families (TANF) recipients
- Veterans (including disabled veterans and those receiving food stamps)
- Ex-felons
- Supplemental Nutrition Assistance Program (SNAP) recipients
- Designated community residents
- Vocational rehabilitation referrals
- Summer youth employees
- Long-term unemployed individuals
To claim the credit, employers must obtain certification that the employee is a member of one of these targeted groups. This certification is typically provided by state workforce agencies or designated local agencies.
Best Practices for Identifying Eligible Employees Include:
- Educating yourself on the eligible groups and the requirements for certification
- Working with a staffing agency or partnering with local organizations to identify eligible candidates
- Keeping accurate records of the certification process and maintaining documentation to support the credit claim
By identifying eligible employees and following best practices for certification, small business owners can ensure that they are maximizing the benefits of the Work Opportunity Tax Credit.
Complete the Required Paperwork
To claim the Work Opportunity Tax Credit, employers must complete the required paperwork. This includes obtaining certification that the employee is a member of a targeted group and submitting IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to the appropriate state agency.
Best practices for completing the paperwork include:
- Ensuring that all necessary information is included on the form, such as the employer’s name, the employee’s start date, and the employee’s targeted group status
- Keeping accurate records of the paperwork, including when it was submitted and any communications with the state agency
- Following up with the state agency to ensure that the certification is received in a timely manner
Common mistakes to avoid when completing the paperwork include:
- Failing to complete all required fields on Form 8850
- Failing to obtain the necessary signatures on the form
- Failing to submit the form to the appropriate state agency within the required time frame
By completing the required paperwork accurately and in a timely manner, small business owners can ensure that they are following best practices for claiming the Work Opportunity Tax Credit.
Know the Deadlines
Another critical aspect of claiming the Work Opportunity Tax Credit is understanding the deadlines associated with the credit. The deadline for submitting Form 8850 to the state agency varies by state but is generally within 28 days of the eligible employee’s start date.
Employers must also receive certification from the state agency within 28 days of the employee’s start date to claim the credit.
In addition to these deadlines, employers must also be aware of the expiration date for the credit. The Work Opportunity Tax Credit was initially set to expire at the end of 2020, but it has been extended through 2025 as part of recent legislation.
However, employers should keep an eye on any potential changes to the expiration date in the future.
Best practices for managing the deadlines associated with the Work Opportunity Tax Credit include:
- Keeping track of the start dates for eligible employees and submitting Form 8850 to the state agency within the required time frame
- Following up with the state agency to ensure that certification is received within the required time frame
- Monitoring any changes to the expiration date of the credit and adjusting hiring practices accordingly
By being aware of the deadlines associated with the Work Opportunity Tax Credit and following best practices for managing them, small business owners can ensure that they are maximizing the benefits of the credit.
Consult with a Tax Professional
While it is possible for small business owners to claim the Work Opportunity Tax Credit on their own, it can be a complex and confusing process.
As such, consulting with a tax professional can be a valuable best practice for ensuring that the credit is claimed correctly and that all eligible opportunities are identified.
Tax professionals can provide guidance on the following:
- Identifying eligible employees and ensuring that all necessary paperwork is completed accurately and in a timely manner
- Maximizing the value of the credit by taking advantage of other available tax incentives and credits
- Providing support and representation in the event of an audit or other tax-related issues
When selecting a tax professional, it is important to look for someone with experience in claiming the Work Opportunity Tax Credit specifically. They should also have a good understanding of the eligibility requirements, the required paperwork, and the deadlines associated with the credit.
By consulting with a tax professional, small business owners can feel confident that they are following best practices for claiming the Work Opportunity Tax Credit and maximizing the benefits of this valuable incentive.
Monitor the Hiring Process
Another best practice for claiming the Work Opportunity Tax Credit is to monitor the hiring process to ensure that all eligible opportunities are identified. This involves working closely with hiring managers and HR staff to understand the targeted groups that are available in the local labor market.
Best practices for monitoring the hiring process include:
- Creating a system for tracking eligible employees and ensuring that all necessary paperwork is completed in a timely manner
- Providing training to hiring managers and HR staff on the eligibility requirements and the benefits of the Work Opportunity Tax Credit
- Regularly reviewing the hiring process to identify areas for improvement and to ensure that all targeted groups are being considered
By monitoring the hiring process and working closely with hiring managers and HR staff, small business owners can ensure that they are maximizing the opportunities for claiming the Work Opportunity Tax Credit. This can help to reduce turnover, improve the quality of the workforce, and provide valuable tax savings to the business.
Common Pitfalls to Avoid
While the Work Opportunity Tax Credit can provide significant tax savings to small businesses, there are several common pitfalls that employers should be aware of when claiming the credit. By understanding these pitfalls and taking steps to avoid them, small business owners can ensure that they are maximizing the benefits of the credit.
Some common pitfalls to avoid include:
- Failing to identify eligible employees: Employers may miss out on the benefits of the Work Opportunity Tax Credit if they do not properly identify eligible employees. This can happen if hiring managers or HR staff are not trained on the eligibility requirements or if employers do not have a system in place for tracking eligible employees.
- Failing to complete the necessary paperwork: Employers must complete the necessary paperwork, including Form 8850 and ETA Form 9061 or 9062, in a timely and accurate manner. Failure to do so can result in a denial of the credit.
- Missing deadlines: Employers must meet specific deadlines for submitting Form 8850 and receiving certification from the state agency. Failure to meet these deadlines can result in a denial of the credit.
- Failing to retain records: Employers must retain records related to the Work Opportunity Tax Credit for at least three years. Failure to retain records can result in a denial of the credit or penalties in the event of an audit.
- Claiming the credit for ineligible employees: Employers must ensure that all employees claimed for the credit meet the eligibility requirements. Claiming the credit for ineligible employees can result in penalties and legal liabilities.
By being aware of these common pitfalls and taking steps to avoid them, small business owners can ensure that they are maximizing the benefits of the Work Opportunity Tax Credit while minimizing the risks and costs associated with claiming the credit.
Conclusion
The Work Opportunity Tax Credit is a valuable tax incentive program that can provide significant savings to small businesses that hire employees from targeted groups.
However, to claim the credit, employers must meet specific eligibility requirements, complete the necessary paperwork, and meet strict deadlines.
By following best practices for claiming the Work Opportunity Tax Credit, such as identifying eligible employees, completing the required paperwork, knowing the deadlines, consulting with a tax professional, and monitoring the hiring process, small business owners can maximize the benefits of the credit while avoiding common pitfalls that can result in penalties and legal liabilities.
Overall, the Work Opportunity Tax Credit can be a valuable tool for small businesses to reduce their tax liability, improve the quality of their workforce, and contribute to their local communities.
By understanding the eligibility requirements and best practices for claiming the credit, small business owners can take advantage of this valuable tax incentive and position their businesses for long-term success.
