The salon industry is no stranger to the age-old problem of employee turnovers and their costly effects. As a business owner, it is crucial to take every opportunity to optimize your financial health. A financial benefit that is often overlooked and underutilized in the beauty industry is the Work Opportunity Tax Credit (WOTC). 

The WOTC is a tax credit available to employers of all sizes who hire individuals from a target group whose members usually find difficulty acquiring employment, such as veterans, ex-felons, summer youth employees, and more. The credit applies to wages paid to the new employee generally during the first year of employment. Taxable employers claim the WOTC as a general business credit against their income taxes, and tax-exempt employers claim the WOTC against their payroll taxes.

The WOTC program was originally established by the Small Business Job Protection Act of 1996. It was designed to encourage employers to hire individuals from diverse backgrounds, help individuals from diverse and disadvantaged backgrounds find employment, and better themselves and the communities around them. In 2021, Congress extended the WOTC until December 31, 2025, with the credit currently set to expire after that. 

The WOTC amount varies based on the employee's hours worked and their eligibility category. For most eligible employees who work at least 400 hours, employers can claim a credit equal to 40% of the employee's wages, up to a maximum of $6,000 in wages (resulting in a maximum credit of $2,400). For employees who work between 120 and 399 hours, the credit is 25% of wages, again up to $6,000 in wages (maximum credit of $1,500). The credit is more generous for eligible veterans who meet certain requirements and work over 400 hours; in this case, employers can claim 40% of up to $24,000 in wages (maximum credit of $9,600). 

It's important to note that while the WOTC is a one-time credit for each new hire and cannot be claimed for rehired employees, there is no limit on the number of eligible employees a business can hire and claim the credit for.

How Does the WOTC Benefit Salon and Beauty Business Owners? 

It is beneficial for beauty business owners to utilize the WOTC to their advantage. By participating in the WOTC program, beauty business owners are rewarded for tapping into a diverse talent pool. 

Beauty business owners can use the WOTC credit to help offset the costs of hiring and training new staff, allowing them to invest the extra savings in their team’s professional growth and the business's overall potential. If your business is located in Alabama, Alaska, Arizona, Delaware, Georgia, Illinois, Maryland, New Mexico, New York, North Dakota, South Carolina, Utah, Washington, or West Virginia, you might be able to avail of a state-level WOTC as well.

While the WOTC is compatible with many incentives and programs, beauty business owners should consult a tax professional before claiming the WOTC alongside other credits, especially any wage-based credits, as the rules can be complex and may change over time.

The WOTC Process

First, you will want to determine if the individual you are hiring falls into one of the target groups for the WOTC program. Target groups include, but are not limited to, qualified:

• Summer youth employees such as apprenticeships, part-time employees, stylist assistants, etc.,

• Ex-felons

• Veterans

• Individuals who received SSI benefits,

• Individuals experiencing long-term unemployment,

• Individuals who received SNAP benefits, 

• Individuals who received long-term family assistance, and 

• Individuals with physical and mental disabilities referred to the employer on rehabilitative services 

The employee and the employer must complete IRS Form 8850, "Pre-Screening Notice and Certification Request for the Work Opportunity Credit," on or before the day the individual is offered employment. This form collects information to determine if the employee belongs to one of the target groups. Once Form 8850 is completed, the employer should submit it along with Form 9061 or Form 9062 (Certification Request), which are used to request certification from the state workforce agency. The forms must be submitted to the appropriate state workforce agency no later than 28 days after the employee begins work.

The state workforce agency will review the forms and determine if the employee qualifies for the credit. If approved, the agency will issue a certification that confirms the employee is a member of a target group. Once approved, a business owner can claim the WOTC by completing IRS Form 5884, "Work Opportunity Credit," and by attaching it to the business's annual income tax return.

It is important to consult a trusted tax professional who can guide you through the WOTC certification process, maximize the program's benefits, and ensure compliance with any additional state-specific guidelines.

Common Misconceptions About the WOTC

Despite its potential benefits, many salon and beauty business owners hesitate to take advantage of the Work Opportunity Tax Credit due to several misconceptions. 

1. The WOTC is only for large corporations:

The WOTC is available to employers of all sizes, from small independent salons to large beauty chains. Even if a business only hires one eligible employee, it can claim the credit.

2. The application process is too complicated": 

While the process does involve paperwork, it's manageable with proper guidance. Many tax professionals can assist with the process, making it much simpler for salon owners.

3. The credit isn't worth the effort:

 The WOTC can provide substantial savings, especially for small businesses. With credits of up to $6,000 for eligible employers and $9,600 for certain veteran hires, the potential tax benefit can significantly offset hiring and training costs.

4. I can't use WOTC with other hiring incentives: 

While there are some restrictions, the WOTC can often be combined with other credits and incentives. Always consult with a tax professional to maximize your benefits.

Conclusion

WOTC is a valuable tool for reducing tax liability while supporting individuals who face significant barriers to employment. By understanding and utilizing the WOTC, you can enhance your salon’s financial performance, develop a skilled and diverse team, expand your clientele, and make a positive impact on your local community. 

While this guide provides an overview of the Work Opportunity Tax Credit, it is advisable to consult with a trusted tax professional who can provide personalized advice based on your specific circumstances. Email Azarvand Tax Law at Info@AzarvandTaxLaw.com or book a free consultation online at AzarvandTaxLaw.com to get started today.