The Work Opportunity Tax Credit (WOTC) program provides valuable tax incentives to employers who hire individuals from specific target groups. When participating in WOTC, it is essential to understand the difference between a certified WOTC credit and a potential credit waiting on the state workforce agency’s determination. Today we will explore the distinction between these two categories and shed light on their implications for your business.

Certified WOTC Credit:

A certified WOTC credit refers to a tax credit that has been officially approved and certified by the appropriate state workforce agency. To obtain a certified credit, employers must follow the necessary steps, including completing the required forms (such as Form 8850 and ETA 9061), obtaining supporting documentation, and submitting the application to the state agency within the specified timeframe.

Benefits of Certified WOTC Credits:

  • Reliability: A certified credit provides certainty as it has been officially approved and verified by the state workforce agency. This assurance allows you to confidently claim the credit on your tax return and factor it into your financial planning.
  • Tangible Tax Savings: Certified WOTC credits directly reduce your federal tax liability, resulting in significant tax savings for your business. The exact amount of the credit depends on factors such as the target group of the hired employee, the number of hours worked, and the wages earned during the qualifying period.

Potential Credit Waiting on State Workforce Agency Determination:

In some cases, the state workforce agency may require additional time to review and make a determination on the eligibility of the candidate for WOTC credits. During this period, the credit is considered a potential credit.

Implications of Potential Credit:

  • Uncertainty: Unlike a certified credit, a potential credit is subject to verification and determination by the state workforce agency. This introduces an element of uncertainty as you await their decision. It is important to note that a potential credit is not guaranteed until it has been officially certified. Only a certain percentage of potential credits become certified and claiming these credits without the certification will potentially open you up to audit risk and penalties.
  • Timing Considerations: While waiting for the determination, you may need to factor in the potential credit in your financial planning, but you cannot claim it until it is certified. This requires careful consideration of the timing of your tax planning and projections. By working with your WOTC vendor, you can come up with a plan and reliable forecast. Again, until it becomes certified you should not claim it.
  • Documentation and Compliance: During the potential credit phase, it is crucial to maintain proper documentation and comply with all WOTC program requirements. This includes retaining relevant records and ensuring that you have met the necessary eligibility criteria for the credit.

Final Thoughts:

Understanding the difference between a certified WOTC credit and a potential credit waiting on the state workforce agency’s determination is essential for effectively managing your WOTC program. While a certified credit provides reliability and tangible tax savings, a potential credit introduces an element of uncertainty until it is officially certified.

As an employer participating in the WOTC program, it is crucial to follow the proper procedures, complete the required forms accurately, and maintain documentation to support your claims. By staying informed about the status of potential credits and carefully managing your financial planning, you can optimize the benefits of WOTC and leverage the program to reduce your tax liability.

Remember to consult with your tax advisor or a WOTC specialist to ensure compliance with program requirements, maximize your tax savings, and navigate the complexities of certified and potential WOTC credits effectively.