The Work Opportunity Tax Credit (WOTC) is a federal tax incentive available to employers who hire individuals from specific target groups that have historically faced significant barriers to employment. This program provides a win-win solution for both employers and employees. Employers receive financial incentives for hiring eligible employees, while employees receive job opportunities and a path to financial stability.
What Is the Work Opportunity Tax Credit?
Overview of the WOTC
The WOTC program was established to help reduce poverty and increase employment opportunities for certain underprivileged groups. It is a dollar-for-dollar tax credit calculated based a percentage of the first-year wages of eligible employees. This tax credit directly reduces income tax dollars owed, rather than being deducted from your profits, making it a highly effective tool for employers looking to lower their tax bill.
Eligible Employee Groups
There are a total of nine target groups eligible for the WOTC:
- Temporary Assistance for Needy Families (TANF) recipients –
Both long-term and short-term recipients, as well as their family members, can qualify.
- Veterans –
The veteran must receive SNAP benefits for at least three months during the first 15 months of employment, have been unemployed for a period of four weeks to six months (consecutive or inconsecutive) in the previous year or have a service-connected disability.
- Ex-felons –
To qualify, the employee must be hired within a year of being convicted of a felony or being released from prison for a felony.
- Designated Community Residents (DCRs) –
A qualified DCR is an individual who is between 18 and 40 years old and resides within an Empowerment Zone, an Enterprise Community or a Renewal Community. The employee must continue to reside in this area following employment.
- Vocational rehabilitation referrals –
The employee must have a physical or mental disability and have been referred upon completion of a state plan approved under the Rehabilitation Act of 1973, an Employment Network Plan under the Ticket to Work program or a Department of Veteran Affairs program.
- Supplemental Nutrition Assistance Program (SNAP) recipients –
A qualified recipient is an individual who is between 18 and 40 years old and is a member of a family that has received SNAP benefits for either the previous six months or for at least three of the previous five months.
- Supplemental Security Income (SSI) recipients –
Individuals who have received SSI within 60 days of their hiring date can qualify.
- Long-term unemployment recipients –
The unemployment recipient must have been unemployed for at least 27 consecutive weeks at the time of being hired. Individuals are not required to have received unemployment benefits for the entire 27-week period, only a portion of it.
- Summer youth employees –
Qualified employees must be between 16 and 18 years old, be employed only between May 1 and September 15 and reside in an Empowerment Zone, an Enterprise Community or a Renewal Community.
Qualifying Wages and Hours
To qualify for the WOTC, the eligible employee must be paid at least $6,000 in qualified wages ($3,000 for summer youth employees) and work a minimum number of hours, as listed below.
| Employee Group | Minimum (Hours or Days) |
|---|---|
| TANF recipients | 120 hrs |
| Veterans | 400 hrs |
| Ex-felons | 400 hrs |
| DCRs | 90 hrs |
| Vocational rehabilitation referrals | 120 hrs |
| SNAP recipients | 120 hrs |
| SSI recipients | 120 hrs |
| Long-term unemployment recipients | 400 hrs |
| Summer youth employees | 90 days |
Credit Amount
The amount of the WOTC can vary depending on several factors, including the type of target group, the number of hours the employee works and the amount of first-year wages paid. For most target groups, the WOTC is equal to 25% of the first-year wages paid to a newly-hired employee, up to a maximum of $6,000. For some target groups, such as veterans, the WOTC can be as high as 40% of first-year wages, up to a maximum of $12,000.
The WOTC is a non-refundable tax credit, which means it can only be used to offset the amount of taxes owed. If the tax credit exceeds the amount of taxes owed, the excess cannot be refunded to the employer.
As the specific rules and requirements for the WOTC can vary from year to year, it’s always a good idea to consult with a tax professional for the most up-to-date information on credit amounts.
Benefits of the WOTC for Employers
Financial Incentives for Hiring Eligible Employees
The WOTC provides a significant financial benefit for employers that hire from eligible target groups. Participating in the WOTC program can also help reduce the costs associated with hiring and training new employees.
Access to Motivated and Qualified Candidates
One of the key benefits of the WOTC program is that it helps connect employers with individuals who are motivated to work and who may have previously faced obstacles in finding employment. Veterans, ex-felons and those who have been unemployed for a significant period of time often face barriers to employment, but they can be excellent employees when given the opportunity. The WOTC helps employers access a pool of motivated and qualified job candidates who are eager to demonstrate their skills and work ethic.
Positive Impact on Company Image
Participating in the WOTC program demonstrates a company's commitment to diversity and inclusion. By actively seeking to hire individuals from target groups, a company is sending the message that it values a diverse and inclusive workforce. This can enhance a company's reputation among employees, customers and other stakeholders.
Additionally, the WOTC program provides an opportunity for companies to give back to their communities and make a positive impact. By providing job opportunities to individuals who may have previously faced challenges finding employment, a company can help these individuals become self-sufficient and contribute to the local economy. This can further improve the company's image and reputation as a socially responsible entity.
Benefits of the WOTC for Employees
Job Opportunities for Hard-to-Employ Individuals
A core goal of the WOTC program is to provide a path to steady employment for those who may otherwise face challenges. Individuals who have experienced discrimination in the past may struggle to find employment due to negative stereotypes and biases, but the WOTC helps to reduce these barriers by offering financial incentives to employers who hire these individuals. By doing so, the WOTC plays a vital role in promoting equality and fairness in the job market and helping underprivileged communities achieve their full potential.
Increased Earnings and Improved Job Skills
Because the WOTC is calculated based on a percentage of first-year wages, it provides an incentive for employers to pay higher wages than they might have otherwise. This enables employees to earn a livable wage, improve their standard of living and reduce the need for government assistance.
The WOTC can help employees strengthen their job skills. By providing employment opportunities, the WOTC empowers employees to gain valuable work experience and develop new skills that can help them advance in their careers. Additionally, many employers offer on-the-job training and other development opportunities to their employees, which can further enhance their skills and make them more attractive to future employers.
Path to Long-Term Employment and Financial Stability
The WOTC program provides opportunities for employees to receive training and skill development through their new jobs, which helps them become more competitive in the job market. This, in turn, improves their long-term employment prospects, giving them the stability and security that comes with having a steady income.
The WOTC also provides employees with access to benefits that can help improve their financial stability. Many employers provide benefits such as health insurance, retirement plans and paid time off. By securing a job through the WOTC, employees may be eligible for these benefits, which can have a significant impact on their overall financial well-being.
How to Apply for the WOTC
Steps Involved in the WOTC Application Process
The steps of the WOTC application process can be difficult and highly complex. Fortunately, Engineered Tax Services offers turnkey services that make claiming the WOTC simple. Here’s what you can expect:
- The service begins with an online form completed by the employee at the time of their application for employment.
- Our tax credit experts will review the employee’s information to determine eligibility.
- If an employee is eligible, then hours will be tracked to establish that the minimum number of hours have been worked, triggering the eligibility of applicable credits.
- Engineered Tax Services will request supporting documentation and file all necessary forms with the IRS.
- You will be issued the eligible credit amounts prior to your next tax return filing.
Required Documentation
The required documentation for the WOTC includes the following:
- Certification form
- Proof of eligibility: This can include proof of SNAP eligibility, proof of veteran status or proof of receipt of TANF, among others.
- Proof of hire: This can include a copy of the offer letter or the first payroll record.
- Proof of wages paid: This can include payroll records or W-2 forms.
- Other supporting documentation: The employer may need to retain other supporting documentation, such as the pre-screening notice and the tax return that includes the WOTC claim.
How Engineered Tax Services Can Help
Navigating the WOTC application process can be challenging, but with the support of experts, it can become a hassle-free experience. Engineered Tax Services is the country's premier specialty tax firm and has a proven track record of successfully assisting clients in securing the WOTC. Allow us to steer you through the maze of bureaucracy and help you take advantage of the substantial economic benefits offered by this valuable tax credit. Contact us today to get started.
