WOTC is a Tax Credit, not a Deduction. What’s the Difference?

WOTC is a Tax Credit, not a Deduction. What’s the Difference?

You may know claiming tax deductions and tax credits can help lower the amount of tax you owe, but do you know the difference between the two?

What is a tax deduction?

A deduction reduces the amount of income you pay taxes on, which means you could pay less in taxes. You subtract deductions from your income before calculating how much taxes you owe. How much a deduction saves you depends on your income tax bracket.

To calculate how much a deduction could reduce your taxes, you multiply the amount of the deduction by your marginal tax rate. For example, if a deduction is worth $5,000 and you are in the 10% percent tax bracket (the lowest), the deduction would reduce your taxes by $500.

Because a deduction’s value to you is tied to your tax rate, the higher your tax rate, the more of the deduction’s benefit you can reap. The lower your tax rate, the less benefit a deduction will have for you. So imagine that you take a $5,000 deduction, but you’re in the 35% tax bracket (the second highest). Now you’re saving $1,750 in taxes.

What is a tax credit?

On the other hand, a credit is a dollar-for-dollar reduction in the amount of tax you owe. For example, if you qualify for a $1,000 tax credit of some kind and owe $5,000 in taxes, that credit will reduce your tax burden to $4,000.

WOTC is a dollar-for-dollar tax credit:

Now that you know the difference between a tax credit and a tax deduction, you can appreciate the great benefits of the WOTC Tax Credit.  For each eligible employee that you hire, your taxes get reduced by the amounts of $2400 – $9600, depending on the WOTC criteria.  This can cut your IRS tax bills substantially.  Contact WOTC.com for more information on claiming the WOTC Tax Credits.