What is the Work Opportunity Tax Credit?

For small businesses, tax credits can be a win-win opportunity, as they can be a great way to decrease your tax burden while taking advantage of financial incentives from the government. One credit all employers should know about is the Work Opportunity Tax Credit (WOTC). It’s a federal tax credit available to employers who hire individuals from certain targeted groups that face significant barriers to employment. 

By encouraging businesses to hire and retain these individuals, the WOTC aims to promote workplace diversity and inclusivity—and also reduce the unemployment rate among disadvantaged groups. Keep reading to learn more about this important tax credit.

How Does the WOTC Work?

The WOTC credit is administered jointly by the Internal Revenue Service (IRS) and the Department of Labor (DOL). According to the DOL, state agencies issued 1.6 million WOTC certifications to employers in 2020. The WOTC is available to companies of all sizes anywhere in the U.S. Employers can claim the WOTC when they hire individuals from specific target groups, such as veterans, individuals receiving certain government assistance, ex-felons, and others. The credit amount can vary depending on the employee's target group and the number of hours worked in the first year, but it generally ranges from $1,200 to $9,600 per qualified employee.

To qualify for the credit, employers first need to obtain certification from their State Workforce Agency (SWA) by submitting IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit). This form has to be completed by the employer and applicant  on (or before) the date of the employment offer, and submitted to the SWA together with the Department of Labor’s ETA Form 9061 or 9062 within 28 days of the employee's start date. (The DOL might also require additional forms, depending on the specific case).

Once you receive certification, you can claim the WOTC as a “general business credit” that applies to your company’s income taxes.

Target Groups Eligible for the WOTC

The Work Opportunity Tax Credit applies to a variety of target groups, including qualified:

• Veterans: Particularly those who are unemployed or disabled.

• Recipients of Temporary Assistance for Needy Families (TANF): Long-term family assistance recipients.

• Supplemental Nutrition Assistance Program (SNAP) Recipients: Individuals receiving food stamps.

• Ex-Felons: Individuals with felony convictions who are hired within a year after being convicted or released from prison.

• Supplemental Security Income (SSI) Recipients: Individuals receiving SSI benefits.

• Long-term Unemployed: Those who have been unemployed for 27 weeks or more.

• Designated Community Residents: Individuals between the ages of 18 and 39 who live in “empowerment zones” or “rural renewal counties.”

The DOL created a helpful WOTC Eligibility Desk Aid to provide more detail on qualified groups.

Additional Qualifications for the WOTC 

To receive the WOTC, an employer must show that a new hire is a member of a targeted group and in their first year of employment. The employee must also work at least 400 hours for the employer. It’s also important to remember that the WOTC is a one-time credit for new hires only, which means employers can’t claim it for any employees who are rehired.

Completing the WOTC Questionnaire

Employers must complete a WOTC questionnaire to gather information necessary for the certification process. This may include the employee's social security number, prior employment history, and other relevant details that confirm the individual's eligibility for the credit. The questionnaire is crucial in determining whether the employee falls into one of the targeted groups.

How Much Credit Does the WOTC Provide?

According to the DOL, the credit ranges from $2,400 up to $9,600. The WOTC generally covers 40% of the first $6,000 paid to an employee, though for some qualified veteran targeted groups, the government may consider up to $24,000 in wages.

Benefits of the WOTC for Employers

The Work Opportunity Tax Credit offers several benefits for employers:

• Reduced Tax Liability: Reduces an employer’s federal income tax liability.

• Diverse Workforce: Encourages diversity and inclusivity in the workplace.

• Positive Community Impact: Helps reduce unemployment rates among disadvantaged groups, contributing to community development.

Final Thoughts

The WOTC is an excellent opportunity for employers to benefit financially while also contributing to social good by hiring people who might otherwise face significant barriers to employment. By understanding the eligibility requirements and completing the necessary documentation, businesses can make the most of this valuable credit.

Employers interested in the WOTC should consult with tax professionals or their State Workforce Agency to ensure they are maximizing their potential benefits. 

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