What Is the Work Opportunity Tax Credit (WOTC)?

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.

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.

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.

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.

Frequently asked questions about the Work Opportunity Tax Credit

1. Is the Work Opportunity Tax Credit the only hiring tax incentive for employers?

No, there are other programs to help employers in their hiring process. For example, there are the following:

Federal Bonding Program (FBP): Employers can receive fidelity bonds when hiring qualifying job applicants. The bonds cover the first 6 months of employment at no cost to the job applicant or the employer.
Employee Retention Credit (ERC) under the American Rescue Plan Act: This act provided a refundable tax credit against certain employment taxes but only applied to wages before January 1, 2022.
Empowerment Zone Employment Credit: This is an incentive program to encourage employers located in an empowerment zone (EZ) to hire employees who also live in the EZ.
Employer Credit for Paid Family and Medical Leave: IRS Code Section 45S offers a tax credit for employers who provide paid family and medical leave to their employees.

These are just a few examples, but employers should take the time to do some research into the programs available in their city, county and state.

2. How does an employer claim their WOTC?

Employers will need to complete the following steps to claim their WOTC:

When the employee accepts the job offer, both the employee and employer must complete Form 8850.
The employer has 28 calendar days from the employee’s start date to submit Form 8850 to the designated local agency in the state in which the business is located.
The DOL will review the forms and may request additional forms before releasing a certification.
After a certification has been approved and released, the employer must fill out a new form:
- Taxable employers file Form 5884 (Work Opportunity Credit)
- Tax-exempt employers file Form 5884-C (Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans)

3. If an employer claims other tax wage-based credits, can they still claim the WOTC?

In most cases, an employee’s wage cannot be used to apply for the WOTC and other wage-based credits. However, this isn’t always the case, and there are instances where a single employee’s income is successfully used for the WOTC and other wage-based credits. It’s best to contact the IRS and understand what the rules are when it comes to your specific employees and business situation.

What Is the Work Opportunity Tax Credit (WOTC)?