The Forgotten Tax Credit for Restaurants

While states are opening throughout the country, the current job market for restaurant owners has been challenging as potential employees are hesitant in the rapidly changing environment. Restaurants can benefit significantly from taking advantage of the Work Opportunity Tax Credit (WOTC) which encourages restaurants to expand their hiring pool.

Eligibility for the WOTC

The WOTC is a Federal Tax Credit that was created in 1996 but has been extended repeatedly and has currently been extended through December 31, 2025 as part of COVID-19-related legislation. This credit was created to incentivize workplace diversity and create access to good jobs for disadvantaged American workers who have faced significant barriers to employment. The pool of candidates meeting these categories grew significantly during the pandemic. The tax credit is awarded for hiring individuals from the following 10 target groups:

Qualified IV-A recipient;
Qualified veteran;
Ex-felon;
Designated community resident;
Vocational rehabilitation referral;
Summer Youth Employee
Supplemental Nutrition Assistance Program (SNAP) Recipient
Supplemental Security Income (SSI) recipient;
Long-term family assistance recipient; and
Qualified long-term unemployment recipient.

Calculation of the WOTC Amount

The amount of the credit has a maximum amount varying from $2,400 – $9,600 per year for each new hire depending on the new hires target group, the employees qualified wages and the number of hours worked in the first year. After 120 hours worked, the credit claimed can be equal to 25 percent of the new hire’s first year of qualified wages capped at a maximum amount ranging from $3,000 to $24,000 determined by the new hires target group. After 400 hours, the credit claimed rises to 40 percent of their first-year wages.

Limitations of the WOTC

In order to qualify for the credit, the employee cannot:

Have worked for less than 120 hours in the year the credit will be claimed
Been a previous employee
Be a dependent
Be a relative
Have received 50% or less of their wages from working in your business

The same wages used to calculate WOTC cannot be used to calculate the following:

the Employee Retention Tax Credit
Employer Paid Family and Medical Leave Credit
other disaster retention credits or forgivable Paycheck Protection Program loan proceeds.

Applying for the WOTC

The employer must obtain certification that an individual is a member of the targeted group in order to claim the credit by filing the following within 28 days after the eligible worker begins work:

Form 8850 “Pre-Screening Notice and Certification Request for the Work Opportunity Credit” (can be completed on the first day or before starting the job) along with
ETA Form 9061 “Individual Characteristic Form” or
ETA Form 9062 “Conditional Certification Form” (If the applicant has been prescreened for the WOTC by the State Workforce Agency (SWA))

After the certification is approved, taxable employers claim the tax credit as a general business credit against their income tax in the year processed by filing forms 3800 and 5884. Unused tax credits can be carried forward for up to twenty years and back one year.

Take Advantage of the WOTC

With the amount of people who have been unemployed during the pandemic, the pool of candidates eligible for the WOTC has increased significantly. Now is the best time to take advantage of this opportunity to reduce your restaurants tax burden and hire the people who need it the most. By expanding your hiring pool and through proper documentation, you can save your business thousands in taxes while increasing your workforce.