What is the Work Opportunity Tax Credit (WOTC)?
The Work Opportunity Tax Credit is a program that gives employers incentives to hire employees more likely to experience significant employment barriers. Examples of individuals in this category are veterans and ex-felons. When an employer hires someone from this category, they may be eligible to take a tax credit based on the following:
- How much the worker makes during their first year at the employer’s company
- How many hours the person works
- The category or demographic of the employee
It’s important to note that this tax credit is given to the employer, not the employee. This means that you, as the business owner, would be eligible to receive the Work Opportunity Tax Credit for business purposes.
The WOTC program was put in place to incentivize workplace diversity and improve access to quality jobs for U.S. employees.
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What types of workers qualify for the WOTC?
The following is a list of the target groups that are eligible for the WOTC:
- Qualified IV-A recipients
- Qualified veterans
- Qualified ex-felons
- Designated community residents (DCRs)
- Summer youth employees
- Vocational rehabilitation referrals
- Supplemental Security Income (SSI) recipients
- Supplemental Nutrition Assistance Program (SNAP) recipients
- Qualified long-term unemployment recipients
- Long-term family assistance recipients
Each target group has certain requirements that must be met for the employee to be eligible for the WOTC. For example, a member of the DCR group must be between the ages of 18 and 40, live in an Empowerment zone, an Enterprise community or a Renewal community and continue to live in that location after being employed.
Related: What Are ER Taxes? A Guide to Employer Taxes
What types of workers are ineligible for the Work Opportunity Tax Credit?
Only those who fall into the target group categories will make a business eligible for the WOTC. Additionally, even if they do fall into one of the target groups, the following individuals are ineligible:
- Business owner’s dependents or relatives
- Majority owners in the company
- People who were formerly employed by your business, except for summer youth
An employer cannot reclaim a WOTC for an employee who has been rehired.
What is the maximum Work Opportunity Tax Credit available?
How much of the WOTC you’ll be eligible to receive when you hire an individual from a target group may vary, but the typical amount of tax credit you can receive is between 25% to 40% of the employee’s wages in the first year of their employment. In most instances, employers are eligible for 25% of the employee’s wages if they work at least 120 hours and 40% if the employee works 400 hours or more in their first year.
For example, if the employee works 200 hours in their first year at your business and earns a total of $20,000, your organization may be eligible for $5,000 in tax credit for that employee. The maximum WOTC is $9,600 per qualifying employee.
Related: What is Tax Abatement? A Guide for Business Operators
Tips for calculating the Work Opportunity Tax Credit for your business
The following are tips to keep in mind to make it easier to calculate the WOTC for your company:
- Have all employees fill out the WOTC forms as part of the onboarding process.
- Submit your WOTC paperwork to the IRS and your state’s workforce agency for each employee within 28 days of the employee’s start date.
- Keep records of eligible employees’ wages and hours worked. Employees must work at least 120 hours to be eligible for the tax credit.
- File Form 5884 and Form 3800 to claim the tax credit as a general business credit with your regular income tax return.
How to find employees that qualify for the WOTC
The WOTC is a fantastic program that benefits both employers and employees. Employers receive money, and employees who often face hiring challenges get an opportunity to work. Luckily, the program doesn’t end there. There are systems to help employers connect with workers who qualify for WOTC.
The American Job Centers and partnering agencies help employers connect with skilled candidates that may come from a targeted group that qualified for WOTC. Employers can connect with American Job Centers and get help with hosting job fairs, recruiting candidates and conducting skills assessments, among others.
Some employees can have a pre-certification confirming their eligibility for WOTC, but this is somewhat rare and not necessary for hiring. Employers can use a state workforce agency (SWA) or participating agency to confirm a candidate’s qualification for the Work Opportunity Tax Credit.
