Employers often overlook a federal tax break available to organizations that hire new employees from certain groups who have traditionally faced obstacles to hiring. While the Work Opportunity Tax Credit (WOTC) is more limited for not-for-profit organizations, it nonetheless presents payroll tax-saving opportunities that can prove especially valuable for organizations that are ramping up hiring.
The WOTC is a federal tax credit available to employers for hiring individuals from certain target groups who have faced significant barriers to employment. To qualify for the WOTC, for-profit employers must hire people who belong to one or more of the ten targeted groups. These groups include formerly incarcerated and individuals with disabilities. However, tax-exempt organizations can claim the credit only for hiring qualified veterans who began work for their organization after 2020 and before 2026.
The amount of the WOTC generally equals 40% of up to $6,000 of wages paid to, or incurred on behalf of, qualified new employees in their first year of employment who work at least 400 hours. As much as $24,000 in wages can be taken into account when determining the credit for veterans with service-connected disabilities who have been unemployed for more than six months. This means an organization could claim a credit of $9,600 for each qualified employee. Lower wage levels can be considered for other types of qualified veterans.
Not-for-profit employers of all sizes can claim the credit and there is no cap on the number of qualified veterans for whom can claim the credit. The credit is limited only by the amount of employer Social Security tax owed on the wages paid to all employees for the tax period in which the credit is claimed.
Nuts and bolts
Local job centers or state workforce agencies can help you find qualified veterans. For example, American Job Centers host job fairs, perform skills assessments, help employers recruit employees and provide support to employees transitioning to new jobs. The Veterans Administration and related agencies are additional sources of qualified veteran job applicants.
Some applicants might be pre-certified as belonging to a qualified veteran group. Pre-certification can prove helpful, but it is not required for an employer to hire or claim the WOTC. For new hires who are not pre-certified, employers must obtain certification that they are qualified veterans from the state workforce agency on or before the first day of work. Employers also have the option of completing a pre-screening notice (IRS Form 8850, “Pre-Screening Notice and Certification Request for Work Opportunity Credit”) on or before the day the job offer is made.
Submit the notice to the state workforce agency to request certification within 28 days of when the employee begins work. New hires must work at least 120 hours before the WOTC credit can be claimed. Once the certification is obtained, the credit can be claimed against the Social Security tax liability by filing Form 5884-C, “Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.” Employers should file the form after the related employment tax return for the relevant tax period is filed.
The IRS advises against reducing the required payroll tax deposits based on any anticipated WOTC (or any tax credits).
Related Read: VOW to Hire a Veteran
If your organization does not prioritize applicants who are veterans, you might want to consider it going forward. Not only can it help further your mission, but the potential tax savings could be significant.
For more information, contact Marva Flanagan at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.