The Work Opportunity Tax Credit (WOTC) provides a federal incentive to encourage employers to hire and retain veterans and individuals from other targeted groups who have consistently faced significant barriers to employment. The maximum credit allowable is generally $2,400 per hire but can be higher for members of some target groups—such as up to $9,600 for certain veterans. The WOTC is capped at $6,240 per worker for tax-exempt employers.
Newly Extended: The Consolidated Appropriations Act, passed by Congress late December, extends the WOTC through December 31, 2025.
Note: Employers cannot claim the same employees as eligible for the WOTC as those they claim for the same period under the employee retention tax credit (ERTC), one of the COVID-19 relief provisions funded under the CARES Act. The ERTC encourages employers to keep employees on payroll.
Overview
Along with other workforce programs, the WOTC promotes workforce diversity and facilitates access to good jobs to people searching for work. Three federal agencies administer the implementation of the WOTC through state workforce agencies that administer the certification process.
In addition to qualified veterans, WOTC-targeted groups include recipients of the following programs:
- Supplemental Nutrition Assistance Program (SNAP), or food stamps
- Supplemental Security Income (SSI)
- Qualified Long-Term Unemployment
- Qualified Long-Term Family Assistance
- Qualified IV-A
Other qualified targeted groups include:
- Summer Youth Employees
- Qualified Ex-felons
- Vocational Rehabilitation Referrals
- Long-term Family Assistance
- Designated Community Residents
How Are Work Opportunity Tax Credits Calculated?
An employer can earn a tax credit equal to 25% or 40% of a new employee’s first-year wages, up to the maximum, for the target group to which the employee belongs. Specifically, employers can earn 25% if the employee works at least 120 hours and 40% if the employee works at least 400 hours. For qualified tax-exempt organizations, the credit is limited to the amount of the employer’s Social Security tax owed on wages paid to all employees for the period the credit is claimed.
A taxable business may apply the credit against its business income tax liability, and the normal carryback and carryforward rules apply.
WOTC Certification/Tax Filing Process
- An employer must obtain certification that an individual is a member of the targeted group before the employer may claim the credit.
- An eligible employer and applicant must file Form 8850, Prescreening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work.
- The employer and applicant must complete the Department of Labor Form 9061, which is the Individual Characteristics Form for the WOTC. Forms 8850 and 9061 are submitted to your state workforce agency.
- After the required certification is secured, taxable employers claim the tax credit as a general business credit on Form 3800 against their income tax by filing the following:
- Form 5884, Work Opportunity Credit to claim the WOTC for qualified first- and/or second-year wages they paid to or incurred for targeted group employees during the tax year
- Form 3800, General Business Credit to claim credits carried over from a prior year
Engineered Tax Services works with business owners to determine eligibility for the WOTC and to coordinate the application process. We can facilitate the application and qualification process for this valuable tax credit.
Work With a Qualified Tax Credit Expert
Claiming tax credits requires a fair amount of documentation required by the IRS. That’s why it’s important to seek professional help from a consultant with a strong expertise in helping taxpayers successfully claim these valuable tax credits.
The tax and engineering experts at Engineered Tax Services have helped companies of all sizes across the U.S. identify and qualify for tax credits. To learn more about the WOTC for business owners, please complete the form on this page. For immediate questions about specialty tax credits, call Engineered Tax Services at (800) 236-6519.
