What is the IRS Work Opportunity Tax Credit?
The goal of the WOTC is not to create new jobs but to encourage employers to hire people from targeted groups by effectively subsidizing their hiring costs. The idea behind the WOTC is that when people from groups that suffer from high levels of unemployment enter the workforce, they can break out of that status by gaining work experience to serve them and their employers now and in the future. Businesses annually claim about $1 billion every year in tax credits under the WOTC.
Congress created the WOTC through legislation in 1996. The credit is currently set to expire at the end of 2025. Its administration is handled jointly by the U.S. Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL).
How does the Work Opportunity Tax Credit benefit employers?
Businesses of any size can qualify for a one-time WOTC tax credit of 25% or 40% of the first $6,000 of wages paid to qualifying employees. The maximum tax credit amount per employee is $2,400.
- A qualified employee for the 25% tax credit is a new employee — not a rehire — who belongs to a targeted group, is in the first year of employment, and has worked for the employer for at least 120 hours.
- If the employee has worked for at least 400 hours, the tax credit increases to 40%.
The income amount subject to the tax credit can be more for hiring qualified military veterans:
- Up to $12,000 for veterans with a disability who have been discharged or released from active-duty service within 12 months before hiring.
- Up to $14,000 for veterans who have been cumulatively unemployed for six months or more in the 12 months before hiring.
- Up to $24,000 for veterans with a disability who have been cumulatively unemployed for six months or more in the 12 months before hiring.
Aside from providing the tax credit, the WOTC can expand the pool of potential job applicants for an employer. The jobs offered to qualified applicants do not need to be permanent. One targeted category, for example, is summer youth employment candidates.
Most employers use the WOTC to reduce their federal tax liability, meaning that most businesses that take advantage of the WOTC are for-profit enterprises. Tax exempt groups that hire military veterans can also use the WOTC to reduce their employer's contribution to the employee's Social Security tax.
What workers are covered by the Work Opportunity Tax Credit?
To qualify for the WOTC, an employer is required to hire a worker from a targeted group. Presently, the following 10 targeted groups are covered:
- People who receive public assistance as a family member under a state program that is federally funded under the Temporary Assistance for Needy Families (TANF) program. The IRS refers to these individuals as "IV-A recipients" after the authorizing provision in the Social Security Act. A person who has received TANF assistance for nine of the 18 months before being hired qualifies.
- People who receive public assistance under the Supplemental Nutrition Assistance Program (SNAP). Eligibility further depends on the person being between the ages of 18 and 40, and who is a member of a family that has received SNAP assistance for either six consecutive months before employment or three of the most recent five months.
- People who have received long-term assistance under an IV-A program. Qualified long-term assistance recipients fall into one of three subcategories:
- People who have received assistance for at least 18 months before being hired.
- People who have received assistance for at least 18 months since August 5, 1997, and no more than two years have passed since the assistance ended.
- People who have become ineligible for assistance because they have reached the maximum time limit for assistance, and no more than two years have passed since the assistance ended.
- People who have received long-term unemployment assistance. This means at least 27 weeks of unemployment when hired, during which time the individual received at least some unemployment compensation.
- People who are receiving Social Security Income (SSI). The person is required to have received SSI within 60 days of being hired.
- Designated community residents. These are people between 18 and 40 who live in Empowerment Zones or in Rural Renewal Counties. Note that the tax credit applies only to wages these people earn while residing in the Empowerment Zone or Rural Renewal County.
- Vocational rehabilitation referrals. These are people who have physical or mental disabilities and who are receiving or have completed rehabilitative services under one of three programs:
- A state plan approved under the Rehabilitation Act of 1973.
- An Employment Network Plan under the Ticket to Work program.
- A program that the U.S. Department of Veterans Affairs runs.
- Summer youth employees in Empowerment Zones. These are people who meet three qualifications:
- They live in an Empowerment Zone.
- They are at least 16 years old but have not yet turned 18 when hired or on May 1 of the same year, whichever is later.
- Their work is done between May 1 and September 15.
- Qualified veterans. Qualified veterans are military veterans who meet any of the following criteria:
- Receipt as a family member of SNAP assistance for at least three of the 15 months before hiring.
- Unemployment for at least four weeks (it does not need to be four consecutive weeks), but for no more than six months, in the 12-month period that ends on the hiring date.
- Unemployment totaling at least six months during the 12-month period that ends on the hiring date.
- Entitlement to compensation for a service-connected disability, if hired no more than one year after active-duty military discharge or release.
- Entitlement for compensation for a service-connected disability, coupled with cumulative unemployment for at least six months during the 12-month period that ends on the hiring date.
- Ex-felons. These are people who, within a year before being hired, were either convicted of a felony-level offense or who have been released from prison after a felony conviction.
How can employers claim the WOTC?
Employers apply for the WOTC in a five-step process.
- Complete a pre-screening. IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit) is the form to use when beginning the application. Employers are required to complete this by the day of making the job offer. You can evidence the job offer through an Employment Contract.
- Provide worker documentation. This means completing ETA Form 9061 (Individual Characteristics Form). When completing this form, additional employee candidate documentation may be needed to prove residence, like a driver's license, or to prove veteran status, like a DD Form 214. Candidates who are receiving public assistance benefits may need a case number to prove eligibility.
- Timely submit all documentation to a state workforce agency. The state workforce agency requires all documentation to be received within 28 days after the new employee starts work.
- Receive an eligibility determination. The state workforce agency decides whether the employment candidate is part of a targeted group and issues a certification for those found eligible.
- Claim the tax credit. Once the employee has worked at least 120 hours, regular employers can claim the WOTC with IRS Form 5884. Tax-exempt employers who hire veterans use IRS Form 5884-C. Be sure to tell your tax professional to claim this credit, if you qualify.
Good employees are where you find them. Sometimes, difficult life circumstances can make it harder for good workers to have the chance to shine for your company, and that is why the WOTC exists. With it, you benefit from payroll tax savings, filling your employment needs, and helping to make your community a better place for everyone by providing gainful employment to people who might otherwise be trapped in chronic unemployment, or reliance on public assistance.
If you have legal questions about employee hiring, agreements, or documentation, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.