Table of Contents
Table of Contents
What Is the Work Opportunity Tax Credit (WOTC)?
The Work Opportunity Tax Credit is a federal tax credit available to employers if they hire and employ individuals from certain groups that struggle to find employment. The WOTC provides tax benefits to employers while also helping people get a job.
Maximum Credit Amount(s)
There isn’t too much of a limit on the amount of WOTC an employer applies for, as long as they are earning enough money to have a high enough tax liability for the credits. The only limit is that the WOTC can’t be more than the amount of business income tax liability or Social Security tax owed by an employer.
What Are the Eligible Targeted Groups of the WOTC?
Only employees from certain groups qualify for WOTC. Here are each of those groups.
Job applicants with a felony on their record can have a hard time finding employment. Often this will come up when background checks are run as part of the onboarding process. If an employer chooses to not hire someone because of their criminal history, it has to be due to a business decision. The WOTC gives employers incentive to hire ex-felons. For WOTC purposes, an ex-felon is considered someone who has been convicted of a felony or been released from prison for a felony sentence within the last year .
Depending on the workforce climate at the time, some individuals can go months without finding employment, despite many applications. If an individual is unemployed for at least 27 consecutive weeks by the time they are hired and have received some unemployment benefits during this time, they qualify for WOTC credit.
TANF refers to Temporary Assistance for Needy Families. These individuals have received assistance from state programs as part of the Social Security Act. Individuals who have received state assistance for nine months during any 18-month period prior to being hired would qualify for WOTC.
If an individual is a veteran, they qualify for a WOTC if they meet any of these qualifications.
- Received food stamps for at least three consecutive months during the 15 month period prior to being hired.
- Been unemployed for at least four weeks(does not have to be consecutive) during the year prior to being hired.
- Eligible for service-connected disability compensation and discharged or released from activity duty within the last year.
SNAP stands for Supplemental Nutrition Assistance Program. It is a government program provided to help needy families eat healthier. An individual who is between 18 and 40 years old and is a part of a family who has received SNAP during the last six months or three of the last five months qualifies for WOTC.
Other less common ones are a DCR (designated community resident), a vocational rehabilitation referral, a qualified summer youth employee, and a qualified supplemental security income recipient. All these groups can also qualify for WOTC, if they meet the criteria.
How to Claim the Work Opportunity Tax Credit
If an employer decides they want to claim WOTC, they need to ensure they process the paperwork correctly and in a timely manner. Here are the five steps an employer must take to claim the WOTC.
Step 1: Complete IRS Form 8850
The IRS Form 8850 is a pre-screening notice and certification request for the WOTC. This needs to be completed and sent to your State Workforce Agency (SWA) so they can confirm whether the employee is in one of the WOTC target groups. The form is completed and signed by the employee and employer (legal guardian if the employee is a minor) and then sent to the SWA.
Step 2: Complete ETA Form 9061
The U.S. Department of Labor’s Individual Characteristics Form, or ETA Form 9061, is completed by the employer. This form documents the employee’s eligibility and is used with the IRS Form 8850 to determine if the employee is eligible for WOTC.
Step 3: Submit IRS and ETA Form
Both of these forms need to be submitted to your SWA within 28 calendar days after the employee’s start date. Failure to do so will lead to the WOTC request being denied by the SWA.
Step 4: Receive Final Determination
After the forms have been submitted to the SWA, a final determination will be sent to the employer for each application. The determination will explain why an employee does or does not qualify for the WOTC. If more documentation is needed to verify an employee’s WOTC eligibility, that will be requested prior to a determination being made. If the employee does qualify, the employer will receive the WOTC certification that allows the employer to claim the tax credit.
Step 5: File for the Credit With the IRS
After receiving certification from the SWA, the employer can file the WOTC with the IRS. Most commonly, an employer receives the credit by filing IRS Form 5884, but a tax-exempt organization should fill out IRS Form 5884-C. An employer cannot submit the form until the employee has worked at least 120 hours in their first year of employment.
Benefits of the Work Opportunity Tax Credit for Employers
Here are some benefits of the WOTC program.
- Tax benefits. Each hire made from a qualified group can decrease an employer’s federal income tax liability by as much as $9,600. These tax benefits can end up saving businesses thousands of dollars, if not hundreds of thousands of dollars, in taxes.
- Increases diversity. Hiring from groups targeted by WOTC increases the diversity of the company. It widens your candidate pool and gives you employees you might not typically consider. According to one study, companies that embrace diversity increase their innovative revenue by 12.9%. For larger companies that have a DEI (Diversity, Equity and Inclusion) department, the WOTC should be a big part of the DEI plan.
- Improves hiring practices.Considering WOTC is a great opportunity to review your current hiring practices. By targeting WOTC qualified applicants, you can ensure that you are being inclusive and non-discriminatory towards applicants.
Questions You’ve Asked Us About the Work Opportunity Tax Credit (WOTC)
What kinds of businesses are eligible for the WOTC?
All businesses are eligible for the WOTC as long as they hire and pay someone who falls within one of the 10 target groups.
Is there a limit to the number of employees that can be certified for the WOTC?
No, there is no set limit on how many employees a company can certify for WOTC. However, the total credit can’t be more than the business income tax liability or social security tax owed by a company.
What happens if an employee is terminated before the end of the first year?
As long as the employee works at least 120 hours in the year, they still qualify for the WOTC credit.
Tanner has over 4 years of HR professional experience in various fields of HR. He has experience in hiring, recruiting, employment law, unemployment, onboarding, outboarding, and training to name a few. Most of his experience comes from working in the Professional Employer and Staffing Industries. He has a passion for putting people in the best position to succeed and really tries to understand the different backgrounds people come from.