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IRS Provides Instructions on Certification Process for Work Opportunity Tax Credit

The IRS releases updates for businesses applying for the Work Opportunity Tax Credit that include instructions for the pre-screening and certification process.

Certain groups consistently have encountered challenges to employment, which is why since 1996 employers who have diversified the workplace by hiring individuals from these targeted groups have been able to benefit from the Work Opportunity Tax Credit (WOTC).

This federal tax credit has been extended multiple times in the past 25 years, including the latest under the Consolidated Appropriations Act, 2021, that moved the sunset of the credit to Dec. 31, 2025.

Other changes have included updates from the Internal Revenue Service (IRS), which on Sept. 19, 2022, provided instructions on pre-screening and the certification process. To demonstrate a job applicant satisfies the requirement for the WOTC, a pre-screening notice must be completed by the applicant and the employer, who then must submit Form 8850 to request certification. The employer has 28 calendar days from the employee’s start date to submit the form.

What Are the Benefits of the WOTC?

The Work Opportunity Tax Credit originally was introduced in 1996 under the Small Business Protection Act to replace the expiring Targeted Jobs Tax Credit. The credit:

  • Reduces the cost of doing business
    • Decreases an employer’s federal income tax liability per employee hired
  • Does not limit the number of individuals a business can hire to qualify for the tax credit
  • Allows certain tax-exempt organizations to hire eligible veterans and receive a credit against the employer's share of Social Security taxes

Who is Eligible Under the WOTC?

Target groups eligible for hiring under the WOTC are:

  • Qualified veterans, including certain unemployed and disabled veterans
  • Certain recipients of Temporary Assistance for Needy Families (TANF)
  • Certain food stamp (SNAP) recipients
  • Designated community residents living in Empowerment Zones or Rural Renewal Counties
  • Qualified vocational rehabilitation-referred individuals
  • Qualified ex-felons
  • Certain recipients of Supplemental Social Security Income
  • Certain summer youth employees living in Empowerment Zones
  • Long-term unemployed, designated by a local agency as an individual enduring a period of unemployment for at least 27 consecutive weeks during which they received state or federal unemployment wages

Note: The WOTC cannot be claimed on any rehires.

Who Can Claim the WOTC?

All employers of any size are eligible to claim the credit. However, there is a difference in what the credit is claimed against. Taxable employers claim the WOTC against income taxes, while tax-exempt employers can only claim the credit against payroll taxes – and only for wages paid to qualified veterans.

How is WOTC Calculated?

Employers who hire WOTC-eligible individuals generally receive a tax credit equal to 40 percent of up to $6,000 of wages paid to a certified member of a target group who is in their first year of employment and performs at least 400 hours of service for the employer. Basically, the maximum credit is $2,400.

An employer may also claim the WOTC on 25% of wages on individuals who work fewer than 400 hours but at least 120 hours.

If you employ certain qualified veterans, you can use up to $24,000 in wages when determining the WOTC.

The U.S. Department of Labor (DOL) provides detailed information on the WOTC, including guidance, resources, and forms.

Paychex Can Help

The WOTC provides a win-win for employers and jobseekers by giving individuals who have faced hiring challenges a chance for employment while rewarding employers who hire them with tax credits.

Your company also might be able to claim other tax credits, in addition to the WOTC. Paychex tax credit services can help you identify and collect funds for which your business qualifies.

We can help you tackle business challenges like these Contact us today

* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.