Work Opportunity Tax Credit Extended Through 2025

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Employers have Additional Opportunity to File During Grace Period

The Work Opportunity Tax Credit (WOTC), a federal incentive for employers to hire workers from targeted disadvantaged groups, was extended through 2025 by the recently enacted COVID-19 stimulus legislation.  In addition, some employers who qualify for the WOTC but didn’t file their forms on time have another chance.  Keep reading to learn more.

Work Opportunity Tax Credit (WOTC) Background

Originally enacted in 1996, the WOTC has been revised and reauthorized numerous times, but was slated to expire at the end of 2020. The five-year extension means business owners can continue to benefit from hiring veterans, workers who have experienced long periods of unemployment, and other targeted groups.

The qualifying groups of workers covered under the WOTC include qualified veterans, qualified ex-felons, workers referred from vocational rehabilitation programs, recipients of SNAP benefits, recipients of Supplemental Security Income (SSI), long-term family assistance recipients, and qualified recipients of long-term unemployment benefits.

For the employer, the tax credit provides recovery of 25% of gross wages paid during a worker’s first year of employment, as long as the worker put in between 120 and 400 hours. For employees who worked more than 400 hours, employers can recoup up to 40 percent.

The maximum tax credit is $9,600 per qualified employee.

For a business owner to take advantage of the WOTC, qualified employees must:

  • Have received unemployment assistance from the government for 27 consecutive weeks. This may seem like a long time, but many employees are hitting this threshold because of the ensuing COVID-19 pandemic.
  • Work a minimum of 120 hours during the prior year before businesses are eligible to claim the credit. The benefit won’t be seen in the first year of the worker’s employment on your tax return, but you’ll see the credit the following year. 
    • If the credit exceeds your business’ tax liability, you can carry the credit backward or forward. Carryback or carryforward is available to pass-through entities including S-corporations, partnerships, and LLCs.  For some, the credit may pass through to a business owner’s personal tax returns.  If that’s your case, and if the credit exceeds your personal tax liability, it may also be carried forward or backward. 

All businesses are eligible for the WOTC even though it’s the employees that must qualify in order for the business to claim the credit.  You should plan to maintain your exiting hiring practices because you are required by law not to ask certain questions of applicants that would let you know about their qualifications and background. 

After hiring an employee, employers perform a screening process to determine qualification.  A pre-screening notice must then be filed with your state’s administering workforce agency, typically during a 28-day period of an employee’s date of hire.  Learn more about these agencies.

Extension of the 28 Day Period; File by January 28, 2021

Some employers may not have submitted proper documentation (Form 8850) within the 28-day period because of the expiration of empowerment zone designations in 2017 and the uncertainty surrounding a potential extension. 

For a short time, an extension has been granted for employers with qualified WOTC employees that didn’t file notices with their designated local agency.  Employers can now submit the completed Form 8850 by January 28, 2021, for employee(s) that were hired on or after January 1, 2018 and before January 1, 2021.  Filing by January 28, 2021 will satisfy the requirement for the WOTC, but the window of opportunity is quickly closing. 

  • If you have already submitted Form 8850 to the appropriate agency, but haven’t been sent a denial notification, there’s no need to re-submit. The agencies are backlogged from the ongoing COVID-19 pandemic. 
  • If you submitted a request and it got denied, you must resubmit it by January 28, 2021.

Empowerment zones in Kansas are often referred to as Rural Renewal Counties.  Learn if your county qualifies.

Additional Resources

Businesses often engage specialty firms to manage the complexity of the WOTC for them.  You may be charged up to 25% of the credit amount to gain access to a firm’s expertise in the area, but outside experts are worth the investment.  Considering the upside tax credit potential, the cost outweighs the potential for inadvertently missing a WOTC-qualified employee already working at your business. 

To learn more about the benefits of the WOTC for your business, contact your Adams Brown advisor.