Work Opportunity Tax Credit (WOTC): What You Need to Know
Federal, state and local governments structure their business tax systems in a manner that benefits their communities and pushes companies to behave in ways that help common well-being. With tax incentives like the Work Opportunity Tax Credit (WOTC), for example, the federal government is using tax discounts to encourage fairer hiring practices – and businesses across the country have been cashing in.
Did you know that, through the WOTC, the government has been helping disadvantaged employable citizens get and keep more jobs? It’s initiatives like these that help military veterans and formerly incarcerated citizens take part in the labor force, and it’s a win-win: businesses get a tax discount and perfectly employable citizens get access to jobs.
You might be wondering: how many different tax credits and incentives are there that businesses can actually capitalize on? The answer is a lot.
From personal tax credits to investing in Opportunity Zones, there are a multitude of ways that both businesses and individuals can benefit from favorable tax laws – and the potential grows even more if they use the right tax credit management solution.
But before we get into the different types of tax incentives, let’s first take a quick look at the Work Opportunity Tax Credit as an example, and how businesses that claim this credit are supporting their communities through their hiring practices – and paying less in taxes as a result.
What is the Work Opportunity Tax (WOTC) Credit?
As part of the federal government’s efforts to aid employable citizens in certain groups who find it hard to land a job, the Work Opportunity Tax Credit (WOTC) was created. This federal tax credit can be claimed by businesses that hire and continue to employ people in specific target groups that face significant employment barriers – like military veterans and vocational rehabilitation referrals.
How Does The WOTC Credit Work?
First things first: the WOTC is a tax credit, meaning a dollar-for-dollar reduction in a tax bill. This is compared to a tax deduction, which – instead – is a reduction in taxable income.
The WOTC is provided on a per-employee basis, so businesses who qualify can claim a tax credit on each employee that meets the required characteristics. How much each tax credit ends up depending on a few factors:
– Which “target group” the employee falls in
– How many hours that employee worked in their first year on the job
– How much they are paid during their first year on the job
Which types of employees are covered under the WOTC?
This tax credit can be claimed for employees that fall under these categories:
– Qualified military veterans
– Recipients of Temporary Assistance for Needy Families (TANF)
– Qualified Recipients of Long-Term Unemployment
– Recipients of Supplemental Security Income (SSI)
– Recipients of Long-Term Family Assistance
– Recipients of the Supplemental Nutritional Assistance Program (SNAP)
– Summer Youth Employees
– Vocational Rehabilitation Referrals
– Designated Community Residents (DCRs)
Each category has its own specific requirements and conditions, and you can check them each out in more detail here.
How much is each WOTC credit worth?
The tax credit amount that a business is entitled to, on a per-employee basis, is really dependent on which category they fit into, and how much they got paid during their first year of employment. Each tax credit has a maximum dollar value that caps off between $6,000 and $10,000 per employee.
What about other types of tax credits?
Healthier communities are made possible with more access to jobs, at which the Work Opportunity Tax Credit is aimed. But what about all the other ways that tax programs like this help our society? Aren’t there multiple tax credits and incentives that businesses of all sizes can claim?
Tax Credits Go Far Beyond Just the WOTC
Just like the government provides tax discounts to spur wide-scale employment of groups who face difficulty in obtaining and retaining jobs, there are a number of other tax credits that financially encourage the improvement of certain aspects of society. Opportunity Zones, for instance, spark investment in economically-neglected regions. There are personal tax credits, too.
And for businesses, it’s not just the WOTC – there are several types of tax credits that range from where businesses choose to operate and what types of equipment they opt to use. It’s no wonder so many firms opt to use tax credit management software to juggle them all.
Other Types of Tax Credits and Incentives for Businesses
Governments, from cities to the federal administration, have developed a number of other tax incentives for companies of all sizes. Beyond the Work Opportunity Tax Credit, businesses are able to benefit from:
– Alternative Motor Vehicle Credit: By choosing to purchase a vehicle powered by an alternative fuel source, like the hydrogen fuel cell Honda FCX Clarity, businesses can claim a credit of up to $8,000.
– Employer-Provided Child Care Credit: Employers that directly fund the child care costs for its employees can claim a tax credit of up to 25% of the total child care expenses (up to $150,000 per year).
– Disabled Access Credit: For businesses that invest in providing physical access to people with disabilities, they can claim a maximum tax credit of $5,000 on $10,000 of spending towards the necessary infrastructure.
Business tax credits like these, and others like the Qualified Research Expenses Credit or the Alcohol Fuels Credit, are the government’s way of influencing businesses to operate in a better, more socially-conscious manner.
Businesses aren’t the only ones the government is trying to influence, however.
It’s not just for businesses – there are personal tax credits too
Sure, a regular person can’t claim the Work Opportunity Tax Credit – they aren’t a business employing workers, after all. Thankfully, tax credits and incentives are provided to individuals and families as well, not just to businesses.
You’ve likely already heard of (or even claimed) a personal tax credit, like the Child Tax Credit for parents, but there are a number of personal tax credits you may not have even known existed, like:
– Adoption Credit: This is a tax discount for parents who adopt children (not including their spouse’s children), and covers up to $13,810 in adoption costs per child.
– Lifetime Learning Credit: For taxpayers attending post-secondary school.
– Savers Tax Credit: A tax discount for those of us contributing to a retirement program like a 401(k).
You might be surprised by which personal tax credits you qualify for – so go check them out (don’t forget to have a look at tax deductions, too).
What about other types of tax incentives?
The government has methods of encouraging development and social stability through other types of tax incentives, like for investors.
For example, investors can get deferred and reduced tax liabilities if they put their money into what are called Opportunity Zone Funds. These funds are investment vehicles that are designed to benefit specific, targeted areas in the United States – places into where investment isn’t naturally flowing.
Investors who decide to invest in Opportunity Zone Funds can reduce their tax burden on certain capital gains by up to 15%, and even cut their tax bill down to zero if they maintain their investment for more than ten years.
Getting the Most Benefit Using Tax Credit Software
From the Work Opportunity Tax Credit to the Child Tax credit, and even investing in Qualified Opportunity Zones, there are seemingly countless ways that companies can save money on their taxes.
The hard truth, however, is that many businesses don’t have the resources to get the most out of these government-backed programs. There are simply too many tax credits and incentives, each with their own complex requirements, for small-to-medium-sized firms to effectively capitalize on each one they’re eligible for.
Without leveraging a leading tax credit management tool, many business owners are losing out on a ton of savings each year – money that could be reinvested to stimulate growth. That’s why proactive businesses turn to The OIX for their tax credit management, to help plan and organize the complicated, ongoing struggle that is claiming multiple tax credits and incentives every year.
As a top-tier tax credit software provider, The OIX provides its clients with immediate visibility and control over their tax incentive plans, while optimizing profitability and ensuring compliance.