Employers of all stripes, both nonprofit and for-profit, 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 nonprofits, it nonetheless presents payroll tax-saving opportunities that can prove especially valuable for organizations that are ramping up hiring. This article reveals how the WOTC can be a win-win for nonprofits and veterans.
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 nonprofits, it nonetheless presents payroll tax-saving opportunities that can prove especially valuable for organizations that are ramping up hiring.
To qualify for the WOTC, for-profit employers must hire people who belong to one or more of 10 “target groups.” These groups include the formerly incarcerated and individuals with disabilities. Tax-exempt organizations, however, 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 qualified new employees in their first year of employment who work at least 400 hours. But 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 more than six months. This means your organization could claim a credit of $9,600 for each qualified employee. Lower wage levels can be considered for other types of qualified veterans.
Nonprofit employers of all sizes can claim the credit, and there’s no cap on the number of qualified veterans for whom you 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 you claim the credit.
Nuts and bolts
Local job centers or state workforce agencies can help you find qualified veterans. American Job Centers, for example, 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 isn’t required for an employer to hire or claim the WOTC. For new hires who aren’t pre-certified, you must obtain certification that they’re qualified veterans from the state workforce agency on or before the first day of work. You 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 you make the job offer.
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 you can claim the WOTC. Once you have the certification, you can claim the credit against your Social Security tax liability by filing Form 5884-C, “Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.” You should file the form after you’ve filed the related employment tax return for the relevant tax period.
The IRS advises against reducing your required payroll tax deposits based on any anticipated WOTC (or any tax credits). The credit doesn’t affect the Social Security tax liability you report on your employment tax return.
If your organization doesn’t 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.