The Work Opportunity Tax Credit (WOTC)Published:
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 created an incentive for employers to hire people from certain targeted groups by offering those employers a tax break called the Work Opportunity Tax Credit (WOTC) that can reduce a business’s federal tax liability.
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 program) is a federal tax credit designed for employers that hire American job seekers from certain targeted groups of people who have consistently faced significant employment barriers. The WOTC is a voluntary program that joins other federal workforce programs that encourage workplace diversity and facilitate access to good jobs and a steady income for American workers. It also benefits employers by reducing their federal income tax liability.
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. Tax-exempt eligible employers who wish to claim the WOTC can only do so against payroll taxes and only for wages paid to members of the Qualified Veteran targeted group.
In general, the tax credit employers can claim is equal to 40% of qualified first-year wages paid to (or incurred in behalf of), an individual who:
- Is in their first year of being employed
- Is a certified, eligible member of a target group
- Works at least 400 hours for said employer
The maximum tax credit is generally $2,400, but can also reach up to $9,600 depending on the targeted group and qualified wages paid to the qualified employee during their first year employed.
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.
As of September 24, 2021, The Consolidated Appropriation Act of 2021 authorized an extended period for the WOTC, making it available for all wages paid to eligible employees who begin work on or before December 31, 2025. (Section 113 of Division EE of P.L. 116-260 — Consolidated Appropriations Act, 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.]
Which Targeted Hiring Groups 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 hiring groups facing barriers to employment:
- Temporary Assistance for Needy Families (TANF) recipients or recipients of state assistance – i.e. qualified IV-A recipients that have received payments fo5r at least 18 consecutive months
- Qualified veterans (e.g., unemployed veterans, including disabled veterans)
- Formerly incarcerated individuals and qualified ex-felons whose date of felony conviction or release is less than one year prior to their date of hire
- Designated Community Residents (DCRs) living in Empowerment Zones (designated areas of high poverty and unemployment) or Rural Renewal Counties
- Vocational rehabilitation referrals by an employment network for people with a physical or mental disability that creates a substantial handicap to employment
- Summer youth employees living in Empowerment Zones or who are a Designated Community Resident
- Supplemental Nutrition Assistance Program (SNAP benefits) or Food Stamp recipients who received food stamps for at least a 3-month period during the 15-month period ending on the hiring date
- Supplemental Security Income (SSI) recipients
- Long-term family assistance recipients
- Qualified long-term unemployment recipients who has been unemployed for more than 27 weeks and received unemployment compensation during this time
To connect with a qualified job candidate or find potential job applicants, consult a partnering agency such as the American Job Centers to find eligible new hires.
RELATED: The Earned Income Tax Credit (EITC)
How Do You Claim the WOTC?
To take advantage of the WOTC, the business or employer must complete application Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit) on or before a job offer is made for a new hire, and submit it within 28 calendar days. Additional documents may be required for certification.
When eligibility has been determined (if the new employee is part of the 10 targeted groups), designated local state workforce agencies (SWAs) will issue a receipt of certification. Taxable employers must then file Form 5884 (Work Opportunity Credit), while tax-exempt employers must file Form 5884-C (Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified or Disabled Veterans) to claim the WOTC
Taxable employers can claim the WOTC as a general business credit against their income taxes on Form 3800. Eligible tax-exempt employers claim the credit against the employer Social Security tax. Generally, the credit is based on wages paid to eligible workers during the first year of employment.
For further information on employee eligibility and how to claim the credit, visit the U.S. Department of Labor website.
WOTC Credit Limitations
The Work Opportunity Tax Credit is limited to the 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.
An employer is unable to claim the WOTC for employees who are rehired: only new-hires make an employer eligible to claim the credit. Other ineligible groups include majority owners of the employer or relatives, spouses, or dependents.
A taxable employer can generally carry the current year’s unused WOTC back one year and then forward 20 years.
For more information about the Work Opportunity Tax Credit and full eligibility, visit the WOTC page on the Internal Revenue Services website.