Work Opportunity Tax Credit (WOTC)
Work Opportunity Tax Credits are obtainable by employers who hire persons who are proven to be part of a specific target group, as defined by the United States Department of Labor’s Employment and Training Administration. Target groups consist of individuals categorized as “at-risk”, or have experienced significant obstacles preventing them from obtaining employment.
Eligible Target Groups
Below is a list of the eligible target groups:
- Recipients of Temporary Assistance for Needy Families (TANF)
- Recipients of food stamps
- SSI recipients
- Vocational rehabilitation referral
- Summer youth employee
- Designated community resident
Each group has its own certification criteria to meet in order to be eligible to work under the WOTC. To view a chart of WOTC eligibilities by target group, click here.
- Previous or returning employees (regardless of time away from employment with the company)
- Any relative or dependent of the employer (including in-laws, cousins, and step-children)
- Any partners or majority owners of the business
What Employers Need to Know about Work Opportunity Tax Credits
Employers receive over $1 billion in federal tax credits under the Work Opportunity Tax Credit program annually. Once enrolled into the program, employers could potentially see up to a $9,600 reduction (per eligible hired employee) in their federal income tax liability.
How WOTC Works
If you own a business in the private sector and hire a new employee that falls under an eligible target group, you can apply for WOTC. Employers are not limited to the number of WOTC employees they can hire, nor is there a minimum number of hired WOTC employees required in order to file for the tax credit.
Federal Tax Credits
Calculating WOTC federal tax credits varies for each individual eligible employee hired and the target group they fall under. A separate claim is made for each employee working under WOTC, and is dependent upon the amount of wages paid and hours worked during the first year of employment with the company. Each target group has a maximum tax credit that can be earned.
Eligible new hires must work a minimum of 120 hours within the first year of employment in order for an employer to be eligible to claim the tax credit.
How to Apply for Work Opportunity Tax Credits
There are five minimal application steps that must be completed to qualify for WOTC. Before filing a claim for the federal tax credit with the IRS, every employer must get a certification from their local State Workforce Agency (SWA) that certifies that the newly hired employee in question falls under one of the official WOTC target groups.
The following must be done by employers in order to qualify for WOTC:
- Complete IRS form 8850: Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to screen employees and make written request the new hire is included in one of the official WOTC target groups. Both employer and employee must sign and date the form before submitting to your State Workforce Agency (SWA).
- Complete the U.S. Department of Labor WOTC form, ETA 9061: This is the Individual Characteristics form. Employers are encouraged to include documentation, if possible, of eligibility for a WOTC target group.
- Submit both forms (IRS and ETA forms) to your SWA: IRS form 8850 must be submitted within 28 day of the new hire. To expedite the process, submit both forms together as one complete application. Many states now accept applications online. Check with your state for more information.
- Receive a determination response: Your application will either be approved or rejected.
- File for WOTC credit if approved: if your application was approved you may then file for the tax credit with the IRS. You will either file IRS Form 5884 or IRS Form 5884-C. You will file IRS Form 5884-C if you are a tax-exempt organization that hires an employee that falls into the WOTC veteran target group.
For more in-depth instructions on how to apply for Work Opportunity Tax Credit, click here.