What Is The Work Opportunity Tax Credit?

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There are many individuals out there that are more than capable of being excellent employees. Unfortunately, some of them struggle to be hired due to their background, especially if it’s the result of poverty, criminal activity, or from being a veteran.

The Work Opportunity Tax Credit is designed to help connect these individuals with employers with the help of financial incentives. The goal, in the words of the Department of Labor, is to help employers “invest in American job seekers.”

Key Takeaways:

• The WOTC is generally 40% of up to $6,000 of wages paid to a targeted individual.

• The IRS lists ten target groups that an employer can hire from to qualify for the WOTC.

• The WOTC helps diversify your workforce while empowering marginalized individuals.

• You must work with your state workforce agency (SWA) to be certified for the WOTC.

What Is The Work Opportunity Tax Credit?

The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers who hire and employ individuals of specific targeted groups that have faced consistent barriers to employment.

The WOTC is found under section 51 of the Internal Revenue Code and is jointly administered by the IRS and the Department of Labor.

The goal of the WOTC is to get employers to invest in job seekers that are normally overlooked or are at some disadvantage in the hiring process. In this way, the tax credit acts as an incentive for businesses to align with Federal policy to diversify the workforce.

Who Qualifies for the Work Opportunity Tax Credit?

Employers who hire and employ individuals from a WTOC-targeted group can apply for and receive the WTOC if they meet all requirements.

The WOTC targeted groups are individuals who are one of the following:

• Qualified IV-A recipient

• Qualified veteran

• Qualified ex-felon

• Designated Community Resident (DCR)

• Vocational rehabilitation referral

• Qualified summer youth employee

• Qualified Supplemental Nutrition Assistance Program (SNAP) benefits recipient

• Qualified Supplemental Security Income (SSI) recipient

• Long-term family assistance recipient

• Qualified long-term unemployment recipient

Before employers can claim the tax credit, they have to apply for and receive certification that verifies the employee is a member of a WTOC targeted group.

Additionally, in most circumstances, for an employer to qualify for a WTOC, the employee must meet the following criteria:

• They are in their first year of employment.

• They perform at least 400 hours of services for the employer.

Exceptions can be made for individuals of target groups who work fewer than 400 hours, but they must still work at least 120 hours.

Employers cannot claim WOTC for employees who were rehired, are a relative or dependent of the employer, or are a majority owner of the employer.

How Much Is the Work Opportunity Tax Credit?

For most circumstances, the WTOC is equal to 40% of up to $6,000 of wages paid to, or incurred on behalf of, someone who meets all WTOC qualifications.

This means that the maximum tax credit is generally $2,400. However, there are exceptions. A 25% rate can be applied to the wages of qualified individuals who work at least 120 hours for their employer. Additionally, up to $24,000 in wages may be taken into account for certain qualified veterans.

Therefore, the WTOC ranges from $1,500 for targeted individuals working at least 120 hours but less than 400 hours to $9,600 for certain qualified veterans.

Why the WOTC is Good for Employers

Along with the financial help, there are additional benefits for employers claiming the WOTC:

• Diversifies the workforce. The WOTC helps diversify an employer’s workforce with the help of financial incentives. Employers are more willing to take on employees who they may have otherwise ignored due to inherent biases.

• Empowers marginalized citizens. Many people who qualify as WOTC employees have backgrounds that make it harder for them to land a job. The WOTC can help break them out of these issues and provide them with a valuable experience they can use to expand their careers.

• Helps develop communities. When businesses use the WOTC to employ targeted groups, it has a positive effect on related communities. It helps avoid unemployment, homelessness, slides into addiction, and other factors that can result when people struggle to find work.

• Expands markets. By diversifying the workforce and contributing to the communities, businesses that use the WOTC can develop new relations with customers and other business partners.

In the end, not only does the WOTC have an immediate financial benefit, but it provides an employer with the opportunity to have a greater economic and social impact on their own business as well as the communities they serve.

How Employers Claim the WOTC

The Department of Labor offers employers a three-step process to claiming the WOTC:

1. Connect with a qualified candidate. You need individuals who meet the specific requirements to be eligible for the WOTC. This can be tricky to determine.

   Unless you feel confident you can find such people on your own, or else you already know individuals who are qualified, it may be in your best interest to work with an appropriate third party.

   State Workforce Agencies (SWAs) administer the WOTC process, and they do so by coordinating partnering agencies to bring together qualified individuals and employers. These partnering agencies can include:

   • American Job Centers

   • Vocational Rehabilitation agencies

   • City and county social service offices

   • Department of Corrections

   • Veterans Administration and related service organizations

   • Workforce Innovation and Opportunity Act (WIOA) grant recipients

   • Additional federal, state, county, or local government agencies

2. File a WOTC certification request with your SWA. Just because you hire a qualified individual does not mean you will receive the WOTC. First, you must be certified by your State Workforce Agency. To apply for and receive certification, you have to submit the following forms to your SWA:

   • IRS Form 8850. This is a pre-screening application that both employer and employee fill out.

   • ETA Form 9061 or ETA Form 9062. Form 9061 is generally used by employers, while form 9062 can be filled out by the partnering agency that helped facilitate the hire.

   Both forms must be submitted within 28 days of your new hire’s start date.

3. Receive a WOTC certification and claim after the first year of employment. Your SWA will provide you with a WOTC certification (ETA Form 9063) as long as your new hire meets the eligibility requirements.

   Then after the first year of employment, you will submit IRS Forms 5884 and 3800 to claim the WOTC when you file your annual Federal taxes.

WOTC Targeted Groups

To be considered a WTOC-qualifying employee, they must be a member of one of the following:

1. Qualified IV-A recipient. This is an individual who is a member of a family that receives Temporary Assistance for Needy Families (TANF) from a state program that is funded under part A of title IV of the Social Security Act. The assistance must be received for any nine months within an 18-month period that ends on the hiring date.

2. Qualified veteran. A qualified veteran meets at least one of the following requirements:

   • They are a member of a family receiving SNAP for at least a three-month period within a 15-month period that ends on the date of hire.

   • They are unemployed for a total of four weeks but less than six months in a one-year period that ends on the hiring date.

   • They are unemployed for a total of six months in a one-year period that ends on the hiring date.

   • They are entitled to service-connected disability and are hired within a year of being discharged or released from active duty.

   • They are entitled to compensation for a service-connected disability and have been unemployed for at least six months within a one-year period from the hiring date.

3. Qualified ex-felon. This is an individual who is hired within one year of either being convicted or released from prison for a felony.

4. Designated Community Resident (DCR). A DCR is between the ages of 18 and 40 and resides principally within an empowerment zone or rural renewal county.

5. Vocational rehabilitation referral. This is an individual with a physical or mental disability that has been referred to the employer while receiving or completing rehab services under:

   • A Rehabilitation Act of 1973 approved state plan

   • A Ticket to Work Employment Network Plan

   • A Department of Veteran Affairs program

6. Qualified summer youth employee. This individual is between the ages of 16 and 18 when hired, or on May 1st, who is employed between May 1st and September 15, and resides in an Empowerment Zone.

7. Qualified Supplemental Nutrition Assistance Program (SNAP) benefits recipients. This individual is between the ages of 18 and 40 and is a member of a family that received SNAP benefits for the previous six months or at least three of the five previous months.

8. Qualified Supplemental Security Income (SSI) recipient. A qualified SSI recipient received SSI benefits for any month ending within the 60-day period before the hire date.

9. Long-term family assistance recipient. This is an individual who is a member of a family that experienced one of the following:

   • Received IV-A program assistance for a minimum of the prior 18 consecutive months.

   • Received IV-A program assistance for a minimum 18-month period beginning after 8/5/1997. The end of the earliest 18-month period must have occurred within two years of the hire date.

   • Within two years of ceasing to be eligible for IV-A program assistance due to a federal or state law that limits the maximum time payments could be made.

10. Qualified long-term unemployment recipient. This is an individual who has experienced no less than 27 consecutive weeks of unemployment at the time of hiring while receiving some form of unemployment compensation during that period.

Tips for Using the WOTC

Like most things related to taxes, using the WOTC can be tricky. Consider the following tips to help you out during the process.

• Have organized documentation. You need to make sure you have all the proper paperwork if you want to get certified for a WOTC.

• Use partnering agencies. State workforce agencies and other partnering agencies provide crucial knowledge and resources related to the WOTC. They can help you locate and certify WOTC-eligible employees.

• Be mindful of deadlines and dates. Much of WOTC eligibility revolves around when your employee is hired and when you send in your paperwork, so make sure to have all of this understood in advance.

• Consider additional hiring incentives. There are other programs, such as the Federal Bonding Program (FBP) and the Employee Retention Credit (ERC), that can help you expand your hiring practices.

• Be empathetic, patient, and open-minded. This can be a confusing process, so it’s important to remember that WOTC employees are just as capable as any other potential employee.

Work Opportunity Tax Credit FAQ

1. What businesses can apply for the Work Opportunity Tax Credit?

   Any business or employer can apply for the WOTC as long as they hire an individual who qualifies as a member of the targeted groups. There are ten targeted groups, with details that can be found on the IRS’s website.

   Note that this individual has to be certified by your state’s workforce agency, which requires you to submit a pre-screening application within 28 days of hiring the individual.

2. Who benefits from the Work Opportunity Tax Credit?

   Both businesses and the employees they hire benefit from the WOTC. The business benefits from receiving a tax incentive to hire a WOTC-qualified individual. These individuals benefit because their background traditionally makes it harder for them to find work.

3. How much is the Work Opportunity Tax Credit?

   The maximum WOTC is generally $2,400. However, the WOTC can range from $1,500 for targeted individuals who work at least 120 hours but less than 400 hours to $9,600 for certain qualified veterans. This is why it is important to clarify exactly who you hire and what makes them a WOTC-qualified employee.

4. Can an employer claim the WOTC if they are eligible for other wage-based credits?

   For the most part, employers can claim the WOTC if they are eligible for other wage-based credits as long as they don’t use the same wages to calculate each credit. Remember that the WOTC has a cap on how much of the wages can be applied.

   Therefore, if you pay additional wages, you may be able to claim other wage-based credits. Consult your state workforce agency or the IRS for further clarification.

References

1. Internal Revenue Service – Work Opportunity Tax Credit

2. U.S. Department of Labor – Work Opportunity Tax Credit

Author

Conor McMahon

Conor McMahon is a writer for Zippia, with previous experience in the nonprofit, customer service, and technical support industries. He has a degree in Music Industry from Northeastern University and in his free time he plays guitar with his friends. Conor enjoys creative writing between his work doing professional content creation and technical documentation.