Work Opportunity Tax Credit (WOTC): Meaning, Target Groups & Certification Process
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Last Updated: 01/30/2024
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Add workers to your company, reduce the number of long-term unemployed, and get paid for the privilege. The Work Opportunity Tax Credit (WOTC) allows companies to reduce their taxes when they hire workers from groups that have historically faced barriers to finding and securing employment. To take part in this program, employers must receive certification for eligible employees and file an additional form with their annual business tax return.
What Is the Work Opportunity Tax Credit (WOTC)?
The Work Opportunity Tax Credit program allows businesses to take advantage of a tax credit when they hire workers from specific groups such as those who have served in the military and even previously incarcerated individuals, to name a few. Tax-exempt organizations may also receive a credit against payroll taxes when hiring veterans. To claim this credit at the end of the year, employers must complete a screening and certification process when hiring eligible employees.
How Does the Work Opportunity Tax Credit Work?
To qualify for the WOTC program, a business must follow certain steps to screen and certify employees from targeted groups.
- Find eligible employees. Businesses can work with agencies like the Department of Labor's American Job Centers to find eligible workers.
- Complete certification forms. Within 28 days of hiring an eligible employee, complete the required IRS and DOL certification forms and submit them to your designated local agency, which may be referred to as a State Workforce Agency (SWA).
- Track employee time. Employees must meet hours requirements for businesses to receive a tax credit at the end of the year.
- Request WOTC credit when filing your annual taxes. Businesses can receive a WOTC that reduces the amount of taxes they owe by up to $9,600 per qualifying employee for those hired before December 31, 2025.
What Are the Benefits of the WOTC?
The Work Opportunity Tax Credit was initially 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 by decreasing 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 specific tax-exempt organizations to hire eligible veterans and receive a credit against the employer's share of Social Security taxes.
Does the WOTC Benefit Employees?
The WOTC benefits traditionally underemployed individuals by incentivizing companies to provide stable work. This opens career opportunities and improves employment options for those in targeted groups.
Who Qualifies for the Work Opportunity Tax Credit?
The Work Opportunity Tax Credit program is open to taxable and tax-exempt employers of any size that meet eligibility requirements. In particular, companies offering blue-collar positions in construction or skilled trades may want to take advantage of the WOTC tax credit through this program. Depending on the types of jobs offered and the number of applicants received from targeted groups, companies may want to enhance their efforts and add WOTC screening as an ongoing part of the hiring process.
Who Is Eligible for WOTC?: WOTC Meaning of Target Groups
Employers can receive a tax credit for each eligible employee belonging to a WOTC target group, as specified by the IRS. Currently, these target groups 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
Who Is Not Eligible for the WOTC?
Some members of targeted groups may not be eligible for WOTC. The WOTC program exclusions include:
- Relatives or dependents of the employer
- Rehired employees
- Employees with majority ownership in the company
How To Claim the Work Opportunity Tax Credit
Once the initial prescreening and certification paperwork has been completed, the company will track the wages of eligible employees throughout the tax year. At year-end, the WOTC is claimed as a tax credit when filing the annual tax return for a business. To claim the credit, a taxable business will include Form 5584, Work Opportunity Credit with their federal return. This form lists the eligible wages and calculates the company's total WOTC credit. Eligible tax-exempt organizations will use IRS form 5584-C to claim any credit.
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.
WOTC Screening and Certification: What Is the Process?
Once an applicant from a targeted group has been identified, they must be screened for eligibility within 28 days of hire. The steps are as follows:
- Completion of IRS Form 8850, Prescreening Notice and Certification Request for the Work Opportunity Credit.
- Completion of Department of Labor (DOL) Form ETA 9061, ETA 9062, and an additional Self-Attestation ETA Form 9175, if required.
- Submit forms to your designated State Workforce Agency (SWA) for approval.
IRS Form 8850: The Work Opportunity Tax Credit Form
To prove a job applicant satisfies the requirement for the WOTC, the prescreening notice must be completed by the applicant and the employer, who then must submit Form 8850 to their designated SWA to request WOTC certification. The employer has 28 calendar days from the employee's start date to submit the form.
A Work Opportunity Tax Credit questionnaire can be used to identify employees from targeted groups and assist with completing the prescreening and certification forms. Before hiring, the job applicant should supply their demographic information and answer the questions in the questionnaire. The job applicant may also indicate if they have already obtained a conditional certification from their SWA.
Recent WOTC Updates
If you plan to hire and employ workers from targeted groups, remember that the IRS often releases updates for businesses applying for the Work Opportunity Tax Credit, including revised prescreening and certification process instructions.
This federal Work Opportunity Tax Credit has been extended multiple times in the past 25 years, including the latest under the Consolidated Appropriations Act, 2021, which moved the sunset of the credit to December 31, 2025.
Other more recent changes have included updates to instructions on prescreening and the certification process. Employers should review the WOTC form updates and instructions each year for additional changes in the program.
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 in their first year of employment and performs at least 400 hours of service for the employer. Therefore, generally, the maximum credit is $2,400.
An employer may also claim the WOTC on 25% of the 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 also offers a WOTC calculator to help make the process easier.
Learn How Paychex Can Help You Leverage the Work Opportunity Tax Credit
The WOTC provides a win-win for employers and job seekers 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 besides the WOTC. Paychex tax credit services can help you identify and collect funds for which your business qualifies.
* 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.