United States: Work Opportunity Tax Credit: Hiring veterans can lower your payroll taxes
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Employers often overlook a federal tax break offered to organizations that hire new employees from certain groups that have traditionally encountered barriers to hiring. Although the Work Opportunity Tax Credit (WOTC) is more limited for nonprofits, it still presents opportunities for payroll tax savings that can be particularly useful for organizations. who are hiring more and more.
The WOTC is a federal tax credit available to employers for hiring individuals from certain target groups who have encountered significant barriers to employment. To qualify for the WOTC, for-profit employers must hire people from one or more of the ten target groups. These groups include formerly incarcerated and people with disabilities. However, tax-exempt organizations can only claim the credit for hiring qualified veterans who started working for their organization after 2020 and before 2026.
The WOTC amount is generally 40% of up to $6,000 of wages paid or incurred on behalf of qualified new employees in their first year of employment who work at least 400 hours. Up to $24,000 in wages may be considered when determining the credit for veterans with service-related disabilities who have been unemployed for more than six months. This means that an organization could claim a credit of $9,600 for each qualified employee. Lower salary levels may be considered for other types of qualified veterans.
Non-profit employers of all sizes can claim the credit and there is no cap on the number of qualified veterans who can claim the credit. The credit is limited only by the amount of the employer’s social security tax due on wages paid to all employees for the tax period in which the credit is claimed.
NUTS AND BOLTS
Local employment centers or state labor agencies can help you find qualified veterans. For example, US job centers host job fairs, conduct skills assessments, help employers recruit employees, and provide support for employees transitioning to new jobs. The Veterans Administration and related agencies are additional sources of qualified candidates for veterans.
Some applicants may be pre-certified as belonging to a group of qualified veterans. Pre-certification can be helpful, but an employer is not required to hire or claim WOTC. For new hires who are not pre-certified, employers must obtain certification that they are qualified veterans from the national workforce agency by the first day of work. Employers also have the option of completing a Notice of Prequalification (IRS Form 8850, “Notice of Prequalification and Application for Certification for Work Opportunity Credit”) no later than the day the offer of employment is made.
Submit the notice to the national manpower agency to request certification within 28 days of the employee starting work. New recruits must work at least 120 hours before WOTC credit can be claimed. Once certified, the credit can be claimed against Social Security tax liability by filing Form 5884-C, “Work Opportunity Credit for Qualified Tax-Exempt Organizations That Hire Qualified Veterans.” Employers should file the form after filing the employment tax return for the relevant tax period.
The IRS advises against reducing required payroll tax filings based on any expected WOTC (or tax credit).
Related Reading: VOW to Hire a Veteran
If your organization does not prioritize candidates who are veterans, you may want to consider it in the future. Not only can this help you further your mission, but the potential tax savings could be significant.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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