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The Work Opportunity Tax Credit (WOTC)

Federal Business Tax Credit Can Help Employers Hire Workers

It’s a tough job market, and many businesses and workers are still struggling with the COVID-19 pandemic and its effects on the economy. The federal government is trying to incentivize employers to hire people from certain targeted groups by offering those employers a tax break called the Work Opportunity Tax Credit (WOTC).

This article covers information about the WOTC provided by IRS notices, news releases, and publications.

What Is the Work Opportunity Tax Credit?

The Work Opportunity Tax Credit (WOTC) is a tax credit designed for employers that hire individuals from certain targeted groups of people who have consistently faced significant barriers to employment. The WOTC joins other federal workforce programs that encourage workplace diversity and facilitate access to good jobs for American workers.

The Consolidated Appropriation Act of 2021 authorized the extension of the WOTC until December 31, 2025. Employers of all sizes are eligible to claim the WOTC, including both taxable and certain tax-exempt employers located in the United States and in certain U.S. territories.

Here are a few recent updates to the Work Opportunity Tax Credit from the IRS:

  • IRS Notice 2020-78 (issued on December 11, 2020) provides transition relief for employers that hired certain individuals residing in empowerment zones by extending the 28-day deadline for employers who submit a certification request for an individual who began work between January 1, 2018, and December 31, 2020.
  • IRS Notice 2021-43 (issued on August 10, 2021) provides transition relief by extending the 28-day deadline for employers hiring individuals who are “Designated Community Residents” or “Qualified Summer Youth Employees” who begin work on or after January 1, 2021, and before October 9, 2021, to submit a completed Form 8850 to the Designated Local Agency (DLA) no later than November 8, 2021.

[NOTE: The certification of an individual as a “Designated Community Resident” or as a “Qualified Summer Youth Employee” requires that the individual reside within an empowerment zone.]

RELATED: Federal Tax Relief for Companies & Business Owners

Which Employees Can an Employer Claim the WOTC For?

The Work Opportunity Tax Credit (WOTC) encourages employers to hire workers certified as members of any of the 10 targeted groups facing barriers to employment:

  1. Temporary Assistance for Needy Families (TANF) recipients – i.e. qualified IV-A recipients
  2. Qualified veterans (e.g., unemployed veterans, including disabled veterans)
  3. Formerly incarcerated individuals
  4. Designated Community Residents (DCRs) living in Empowerment Zones or Rural Renewal Counties
  5. Vocational rehabilitation referrals
  6. Summer youth employees living in Empowerment Zones
  7. Supplemental Nutrition Assistance Program (SNAP) recipients
  8. Supplemental Security Income recipients
  9. Long-term family assistance recipients
  10. Qualified long-term unemployment recipients

Before an employer can claim the WOTC, they must obtain certification that an individual/worker is a member of a targeted group. An eligible employer must file Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit) with their respective state workforce agency within 28 days after the eligible employee begins work. Do not submit this form to the IRS!

RELATED: Top COVID-Relief Tax Breaks

How Do You Claim the WOTC?

Eligible employers can claim the Work Opportunity Tax Credit on their federal income tax return. Generally, the credit is based on wages paid to eligible workers during the first year of employment.

You can figure the credit on Form 5884 (Work Opportunity Credit) and then claim the credit on Form 3800 (General Business Credit). Tax-exempt organizations should claim the credit on Form 5884-C (Work Opportunity Credit for Qualified Tax Exempt Organizations).

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WOTC Limitations

The Work Opportunity Tax Credit is limited amount of the business income tax liability or Social Security tax that is owed.

Taxable employers can apply the WOTC against their business income taxes – and the normal carry-back and carry-forward rules apply.

Qualified tax-exempt employers can claim the WOTC only against payroll taxes – and only for wages paid to members of the Qualified Veteran targeted group. The credit is limited to the amount of employer Social Security tax owed on wages paid to all employees for the period the credit is claimed.

RELATED: The Earned Income Tax Credit (EITC)

Extended WOTC Deadline for Some Targeted Groups

Generally, employers are required to submit Form 8850 to their state workforce agency within 28 days after the eligible person begins work. However, a special relief provision gives employers until November 8, 2021 to submit the form to their state workforce agency if they hire people from two specific targeted groups:

  • Qualified summer youth employees living in Empowerment Zones, and
  • Designated community residents living in Empowerment Zones

To qualify for this extended deadline, eligible employees must start work on or after January 1, 2021, and before October 9, 2021. For more information, including other requirements and details, please see IRS Notice 2021-43 and the instructions for Form 8850.

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