When you hear about big companies paying hiring bonuses to attract employees, doesn’t it frustrate you? “It’s not fair,” you might think to yourself (or maybe you say it out loud). Those companies have more money, and they’re enticing good people away.
It’s true that big companies often have more resources than smaller businesses. But that doesn’t mean that you can’t afford to pay hiring bonuses. You can—and if you do it the right way, you can have the U.S. government pay for it.
How? By taking advantage of the Work Opportunity Tax Credit (WOTC).
The WOTC has been around for a number of years, and thanks to recent COVID-related legislation, it’s been extended through 2025. For small businesses, it can be very lucrative. If you use it the right way, you could be eligible for a $9,600 credit per employee against either your income or your payroll taxes.
This is a credit, not a deduction; it directly reduces the taxes you owe. Since you can take it against your employer payroll taxes, it’s advantageous whether your business is a for-profit or non-profit.
How does the WOTC work?
First, you need to be sure to hire employees that qualify for the WOTC. For example, you can take the credit if you employ someone out of the military. You can look for employees in places that help vets find jobs, like Hireveterans.com and Recruitmilitary.com.
You can also take the credit if you hire someone out of prison, so check out the Federal Bureau of Prisons and your state’s Department of Corrections. Look for resources that help people who have served their time get back into the job market.
You can also take the credit if you hire a qualified recipient of certain government benefits, or if you hire someone who has been unemployed more than 27 weeks.
If you plan to take the WOTC, notify your state and the IRS by using Form 8850, the Pre-Screening Notice and Certification Request. File this form within 28 days of hiring.
This is pretty much a rubber-stamp process. But you should complete it to make sure you’ve qualified for the credit and to determine out the exact credit you may receive based on the candidate’s eligibility and compensation.
When it comes time to claim the credit, use IRS Form 5884. If you don’t use the full credit, you can carry it back one year or forward 20 years.
A WOTC hiring bonus example
Let’s say you’re hiring someone out of prison. After doing the math, you’ve calculated that you should be eligible for a WOTC of about $5,000.
Before you extend an offer, go to the candidate and say: “Come work for us. After a trial period, we’ll give you a $3,000 hiring bonus.”
Is the business down the street offering the same incentive to that employee? Probably not. Offering a hiring bonus could make the difference between landing an employee or losing them. Plus, you’re still $2,000 ahead of the game—and it’s all paid for by Uncle Sam.
Of course, there are more rules to follow and additional hiring parameters. And the calculation isn’t exactly easy. I suggest you work with your accountant before offering a hiring bonus to a new employee. That way, you’ve got a financial expert doing the math and checking the rules.
Ultimately, if you spend a little time and effort and hire the right people, you can receive a significant bonus from the government and use it to help your recruiting efforts.
Unemployment is at historic lows, and job openings are at historic highs. Every one of my clients is looking for talent. I bet you are too. I know you’re competing against bigger companies for this limited pool of workers. Taking advantage of the WOTF and using it to offer a hiring bonus could be the key to attracting an employee. And it won’t cost you a cent.
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How do you calculate on how much money am I going to get for each employee that I hire? Do I have options if I am just a store manager or the form must be issued by the owner of the company?
The calculation is done on form 5584:
https://www.irs.gov/pub/irs-pdf/f5884.pdf
You can run through this on your own or – I recommend – having your accountant do this for you in advance of hiring so you can calculate the credit (and the potential bonus) in advance.
We are an S-Corp, we don’t pay Fed income tax, so this doesn’t benefit us?
You do. You can take the credit against the taxes you owe on your 1040 after your business income passes through. Or you can take the credit against your employer taxes. You should definitely discuss this with your accountant.