Have you hired a veteran? What about a SNAP recipient or ex-felon? If so, you may be eligible for the Work Opportunity Tax Credit (WOTC). Get to know all-things WOTC, including what is a work opportunity tax credit, which businesses are eligible, and how to apply. What are you waiting for? Get reading!
What is the WOTC?
What does WOTC mean? The Work Opportunity Tax Credit, or WOTC, is a business tax credit for employers who hire and employ individuals from certain target groups (e.g., veterans) who have faced barriers to employment.
The goal of the WOTC program is to:
- Incentivize workplace diversity
- Facilitate access to jobs for American workers
- Lessen the burden on other government assistance programs
Qualified employers and some tax-exempt companies who hire an individual who is a member of a WOTC target group can apply for a credit against their income tax.
The credit is available for wages paid to certain individuals who begin work on or before December 31, 2025.
How much is the tax credit?
The WOTC is equal to 40% of up to $6,000 wages paid or incurred. This makes the maximum credit $2,400 (0.40 X $6,000) for each employee who:
- Is in their first year of employment
- Is a member of an eligible group
- Works at least 400 hours for their employer
The WOTC is a one-time credit for each new hire. This means you can’t claim the credit if you rehire an employee who meets the criteria for the credit.
If an individual works 120 – 399 hours, a 25% rate applies instead.
Who qualifies for the Work Opportunity Tax Credit program?
Businesses can qualify for the work opportunity credit if they hire individuals from targeted groups who face major obstacles to employment.
Targeted groups include:
- Qualified short-term and long-term IV-A recipients (Temporary Assistance for Needy Families)
- Qualified veterans
- Ex-felons
- Designated community residents
- Vocational rehabilitation referrals
- Summer youth employees
- Supplemental Nutrition Assistance Program (SNAP) recipients
- Supplemental Security Income (SSI) recipients
- Qualified long-term unemployment recipients
Both taxable businesses and some tax-exempt organizations can take advantage of this credit. Here’s a brief breakdown of how it works:
- Taxable employers can claim the credit against income taxes.
- Tax-exempt organizations and businesses can claim the credit only against payroll taxes and for wages paid to members of the qualified veteran targeted group.
Who is not eligible?
Even if they meet requirements and are part of a targeted group, the following individuals do not count for the credit:
- Rehired employees
- Family members or dependents of the employer
- Someone who will be a majority owner in the business
What to know before claiming the credit
Before claiming a credit, you must receive certification from a State Workforce Agency (SWA) saying that the new hire meets the credit’s qualifications.
Fill out Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, and submit it to the SWA within 28 days of the new employee’s start date. Do not submit Form 8850 to the IRS. The new hire must also complete page one (aka, the WOTC questionnaire) of Form 8850 on or before the day of the job offer.
The Department of Labor (DOL) also requires an additional form. You need to file one of the following forms along with Form 8850:
- ETA Form 9061, Individual Characteristics Form
- Employee completes this form
- Employer verifies that the information is correct using supporting documents (e.g., copy of the employee’s birth certificate)
- Send along with Form 8850 to the SWA
- ETA Form 9062, Conditional Certification
- Employer completes this form
- Fill out only if the employee has already been conditionally certified
- Send along with Form 8850 to the SWA
For more information on filling out Forms 9061 and 9062, check out the DOL’s website.
How to claim the WOTC
To claim the WOTC, you need to follow a few steps. Once you find an eligible employee, use the steps below to claim your credit:
- Fill out Form 8850 with your new hire on or before the job offer date to see if they qualify.
- Send Form 8850 along with either Form 9061 OR 9062 to the SWA within 28 days of the eligible employee’s start date.
- Monitor hours worked and wages (minimum 120 hours to receive any type of WOTC).
- Claim the credit using Form 5884, Work Opportunity Credit, when filing annual tax returns.
- Keep copies of documentation and forms in your records for safekeeping. Be sure to keep a record of the hours worked and wages for each eligible employee, too.
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This article is updated from its original publication date of March 18, 2016.
This is not intended as legal advice; for more information, please click here.