Your business should claim as many tax credits as possible to reduce tax liability and save money come tax season. The Employee Retention Tax Credit (ERTC) and the Work Opportunity Tax Credit (WOTC) are available to U.S. businesses that meet specific criteria. But which is right for your business, and can you claim both?
Learn the differences between the ERTC and the Work Opportunity Tax Credit and how to determine your eligibility.
Employee Retention Tax Credit
The CARES Act launched the Employee Retention Tax Credit (ERTC) early in the 2020 pandemic to incentivize businesses to retain employees. In 2023, this tax credit is still available to claim as an amendment to 2020 and 2021 tax returns.
You may be eligible for the ERTC if your business experienced a significant decline in gross receipts due to pandemic-related shutdowns. When looking at 2020, a significant decline would be at least 50% compared to the same quarter in 2019. Meanwhile, the definition is a little broader for 2021 income; a significant decline would be at least 20% compared to 2019.
The maximum refund per employee is $5,000 for 2020 and $21,000 for 2021. The credit you can qualify for depends on your number of employees and the tax year you’re claiming it for.
If you run a small business (100 or fewer employees for 2020 filing purposes or 500 or fewer employees for 2021 filing purposes), you can claim qualified wages for every employee. If your business exceeds these figures, you can claim for all of the employees to whom you paid full-time wages but who did not work full-time hours because of the pandemic.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is a federal tax credit that rewards employers for hiring employees in certain underrepresented populations. These employees come from target groups who have consistently faced significant barriers to employment, such as:
- Veterans
- IV-A recipients
- Ex-felons
- Designated Community Residents (DCRs)
- Vocational rehabilitation referrals
- Long-term family assistance recipients
- Summer youth employees
- SNAP benefit recipients
- SSI recipients
- Long-term unemployment recipients
To be an eligible employer under the WOTC, you must pre-screen and gain certification from your Designated Local Agency to show that a new employee is a member of an eligible targeted group. This tax credit would be worth 40% of up to $6,000 of wages you paid to qualified employees who worked at least 400 hours in their first year of employment.
Are You Eligible for Both?
So which should you claim: the ERTC or the Work Opportunity Tax Credit? If you meet the qualifications for both tax credits, you may be able to claim both for the same tax year, as long as:
- You are not taking advantage of the Paycheck Protection Program
- You do not use the same wages to calculate both credits
Your business can claim both credits on qualified wages for the same employee, but you can’t use the same wages to calculate both credits. As long as you qualify, you could claim the ERTC for employees who are not part of the target groups under the WOTC and vice versa.
Seek Assistance from Qualified Tax Attorneys
Claiming tax credits correctly is vital, as miscalculations could lead to penalties from the IRS and even tax evasion charges. To ensure you understand the differences between the ERTC and the Work Opportunity Tax Credit and claim these credits accurately, turn to the professionals at Dayes Law Firm. Contact Dayes Law Firm at (800) 503-2000 today for a free consultation about claiming tax credits your company may be entitled to receive.