The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who hire people in certain target demographics who often experience employment barriers. Employers can claim tax credits each year for each employee they hire in this demographic. 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 employee you hire who falls into an eligible category would not receive any of this tax credit. 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
Veterans
Ex-felons
Designated community residents (DCRs)
Summer youth employees
Vocational rehabilitation referrals
Supplement security income (SSI) recipients
Supplemental Nutrition Assistant Program (SNAP) recipients
Qualified long-term unemployment recipients
Long-term family assistance recipients
Certification requirement
To claim the credit, an employer must first get certification that an individual is a member of the targeted group. They do so by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to their state workforce agency within 28 days after the eligible worker begins work.
Figuring and claiming the credit
Eligible businesses claim the work opportunity credit on their federal income tax return. It is generally based on wages paid to eligible workers during the first year of employment. After the employer receives Form 8850 certification, they figure the credit on Form 5884, Work Opportunity Credit, and then claim the credit on Form 3800, General Business Credit.
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 of employment at your business and earns a total of $20,000, your organization may be eligible for $5,000 in tax credit for that employee.
Credit limitations on the credits
For a taxable business, the credit is limited to the business’ income tax liability. Any credit remaining above the income tax liability is subject to the normal carry-back and carry forward rules. For qualified tax-exempt organizations, the credit is limited to the amount of employer Social Security tax it owes on wages paid to qualifying employees.
Special rule for tax-exempt organizations
A special rule allows tax-exempt organizations to claim the credit only for hiring qualified veterans who began work for the organization between 2020 and 2026. After the employer receives the Form 8850 certification, these organizations claim the credit against payroll taxes on Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations
Sources: IRS, Indeed.