Work Opportunity Tax Credit (WOTC)


What is the Work Opportunity Tax Credit ?


The WOTC (Work Opportunity Tax Credit) is a Federal tax credit available to employers for hiring and employing individuals from specific targeted groups who have faced significant barriers to employment.

WOTC joins other workforce initiatives that encourage workplace diversity and make it easier for Americans to acquire good jobs. Employers may meet their business needs and claim a tax credit if they hire an individual who is in a Work Opportunity Tax Credit targeted group.

Before claiming the tax credit, employers must apply for and obtain a certification verifying the new hire is a member of a targeted group. After obtaining the necessary certification, taxable employers can deduct the WOTC from their income taxes as a general business credit, while tax-exempt businesses can deduct it from payroll taxes. The Work Opportunity Tax Credit was extended until December 31, 2025 through the Consolidated Appropriations Act, 2021.

Key Facts of Work Opportunity Tax Credit 2022


  • Employers who hire workers from specific targeted group are eligible for the WOTC.
  • To be eligible for the WOTC, employers must fulfill the pre-screening and certification requirements.
  • Documents related to pre-screening and certification must be delivered to the relevant state workforce agency within a certain time frame following employee employment.
  • The credit is determined by the category of workers, the pay they received during their first year of employment, and the number of hours they put in.
  • Before submitting an application for the tax credit, an employer must first obtain a decision of eligibility from its state workforce agency.
  • The employer must submit an application form to the IRS together with the business's or owner's tax return in order to be eligible for the tax credit.
  • The WOTC is non-refundable, the business must have a tax liability against which to use the credit.
  • Unused credit can be carried forward for 20 years and carried back one year.

How Does the Work Opportunity Tax Credit Work ?


The Department of Labor (DOL) and the U.S. Treasury jointly administer the work opportunity tax credit through the Internal Revenue Service (IRS). The IRS is in charge of administering tax-related procedures for claiming the credit, while the DOL provides grant funding and policy direction to state agencies that regulate the certification process.

A federal government initiative known as the work opportunity tax credit (WOTC) program aims to increase employment opportunities for people who frequently face certain barriers to employment, such as veterans, recipients of public assistance, or ex-felons.

The WOTC generally equates to 40% of up to $6,000 in earnings given to or incurred on behalf of a person who :
  • In their first year of employment.
  • Certified as being a member of a targeted group.
  • Performs at least 400 hours of services for that employer.

Employers who hire someone who belongs to a WOTC target group can claim for a general business credit against their income tax if they are taxable employers or eligible tax-exempt organisations.

By extending the 28-day deadline for employers hiring Designated Community Residents or Qualified Summer Youth Employees who start working on or after January 1, 2021, and before October 9, 2021, to submit a completed Form 8850 to the designated local agency (DLA), on or before November 8, 2021, Notice 2021-43, released on August 10, 2021, provided transition relief.

By extending the 28-day period for companies that file a certification request for a person who started employment between January 1, 2018, and December 31, 2020, Notice 2020-78, released on December 11, 2020, provides transition relief for businesses who recruited specific residents of empowerment zones.

An individual must reside in an empowerment zone in order to be eligible for the transition relief under either notification.

Who Qualifies for the Work Opportunity Tax Credit ?


If an employer hires someone who belongs to a target group that the IRS has determined has historically experienced barriers to employment, the employer may be eligible for the Work Opportunity Tax Credit.

Work Opportunity Tax Credit Target Groups


The following groups are considered as WOTC target groups :

There are particular qualifications within each category in addition to the overall requirements. Details are provided in this Work Opportunity Tax Credit Eligibility Chart from the Department of Labor (DOL).

Not Eligible Employees under the Work Opportunity Tax Credit


There are some exclusions from the WOTC target groups list. Rehiring former employees, family members, dependents, or those who will hold a majority ownership stake in the company may prevent employers from claiming the tax credit for such people (even if the individual is otherwise a member of an eligible target group).

Eligible Businesses for the Work Opportunity Tax Credit


Under the WOTC program, any business, regardless of size or sector, may be qualified to receive tax credits. Additionally, there is no limits on the number of participants that firms can hire through the program, therefore there is also no limit on the number of credits they can submit.

How To Qualify a Worker under WOTC ?


To be eligible for the work opportunity tax credit, employers must attest that any prospective employees belong to a specified group. This entails completing many forms with data from the employer and the employee. Both the employer and the candidate must complete two forms throughout the recruiting procedure, either ahead of or on the day the employee starts work.

IRS Form 8850 :

You must first complete IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, together with the applicant. Employers pre-screen candidates for targeted groups using Form 8850, then submit a written request to their state workforce agency (SWA) to certify the candidate as a member of that group for the purpose of being eligible for the work opportunity credit.

DOL Form 9061 :

Additionally, you and the applicant must finish DOL Form 9061. The employer verifies the submitted identification documents once the applicant fills out the application. Some candidates might already have submitted DOL Form 9062, Conditional Certification.

The state workforce or employment agency must receive Forms 8850 and 9061 as soon as the employee is hired in order to determine whether or not they qualify for the WOTC credit. The documents must be turned in no later than the 28th day after the employee starts working.

Employers can submit WOTC applications online in several states. For information on how to submit applications, contact your state's workforce or employment agency. The state agency notifies the employer with a determination letter once it has verified the worker's qualifying status.

Note :
Using the DOL's WOTC Tax Savings Calculator, you can calculate your possible tax credit. The prospective tax credit's size is calculated based on an assumption that each employee will earn $2,400.

Limitations on WOTC


The credit is only worth the amount of unpaid Social Security taxes or unpaid company income taxes. A taxable business may offset the credit against the amount owed in business income taxes. Generally speaking, taxable employers are permitted to carry any unused WOTC from the current year back one year and then forward up to 20 years.

The credit is only available to qualifying tax-exempt organisations and is capped at the employer Social Security tax due on the organization's total taxable social security earnings and tips recorded for the employment tax period in question. 


How Much is the Work Opportunity Tax Credit ?


The amount of the tax credit available under the Work Opportunity Tax Credit program varies based on the employee’s target group, total qualified wages paid and total hours worked. Depending on the WOTC target group of the new hires, the credit amount for each qualifying new hire can up to $9,600.

The credit is calculated as a percentage of the qualifying employee's pay, and in order for the employer to obtain credit, the employee must work a minimum of 120 hours. The maximum credit an employer may receive is equal to the amount of unpaid Social Security or business income taxes.

VETERAN TARGET GROUPS

CREDIT AMOUNT

Veterans with a service-connected disability who have been unemployed for at least 6 months in the past year

$9,600

Veterans with a service-connected disability and hired within 1 year of their discharge/release date

$4,800

Veterans who have been unemployed for at least 6 months

$5,600

Veterans receiving SNAP benefits

$2,400

Veterans who have been unemployed for at least 4 weeks but less than 6 months 

$2,400

NON-VETERAN TARGET GROUPS

CREDIT AMOUNT

Long-term unemployed

$2,400

SNAP recipients

$2,400

TANF recipients

$2,400

Long-Term Family Assistance recipients who are members of a family that has received TANF benefits for at least 18 consecutive months

$9,000

Supplemental Security Income recipients

$2,400

Vocational rehabilitation referrals

$2,400

Ex-felons

$2,400

Designated community residents

$2,400

Summer Youth program participants who are 16 to 17 years old, work between May 1 and September 15, and live in a designated community area

$1,200

How to Apply for the Work Opportunity Tax Credit ?


Taxable employers claim the WOTC as a general business credit against their income tax by filing the following on Form 3800 after receiving the required certification.

For this form, you will sum up all the pay of qualifying employees according to their category and the number of hours they put in, then multiply that total by the number of hours worked over the course of the year and the relevant percentages. The form is annexed to the tax return and used to figure out whether a person or a business owes taxes. The state Department of Labor must receive Form 8850 within 28 days of the start date for certification.

For further information, visit the DOL Employment and Training Administration's website on WOTC and the instructions for Form 8850.

Contact Work Opportunity Tax Credit


Work Opportunity Tax Credit representatives are available to assist you by phone, email, or online. Visit Contact WOTC for more information.

Frequently Asked Questions


What is a Work Opportunity Tax Credit screening?
Employers utilize WOTC screening to assess whether a prospective hire qualifies to be taken into account when calculating the employer's tax credit. Depending on the number of hours they put in and whether they fall under one of the worker categories that qualify, the employee must fulfill the requirements. Both the business and the candidate fill out IRS Form 8850, a pre-screening form for the state workforce agency, and Department of Labor Form 9061 to determine whether they qualify for federal tax credits. The employer may then submit an application to the IRS for the tax credits for all employees after the state agency notifies them that the employee is qualified.

How the Work Opportunity Tax Credit Affects Business Taxes ?
The credit, along with other tax credits, may be applied by a business against its income tax due for the year in a particular order. Depending on the type of business, a specific tax form must be submitted to claim the tax credit. Applications for WOTC tax credits are included on Forms 1040 or 1040/SR by pass-through enterprises, in which the profits and losses of the company are distributed to the owners. The WOTC credit can only be used up to the amount of unpaid Social Security or company income taxes.

What benefits does the employee receive from the Work Opportunity Tax Credit?
Although personnel hired under the WOTC program do not receive additional compensation for falling within a specific category, their chances of employment are improved by the program. For each qualifying person, the tax credit amount may range from $1,500 to $9,600, offering the business an incentive to hire someone who might not have the same qualifications or experience as other candidates.

Are both tax-exempt and taxable employers of any size eligible to claim the WOTC?
Employers of all sizes are permitted to submit WOTC claims. The United States and a few of its territories' taxable and tax-exempt employers are included in this. While eligible tax-exempt employers can claim the Work Opportunity Tax Credit only against payroll taxes and only for earnings provided to members of the designated category of Qualified Veterans, taxable employers can do the same.

Does the WOTC benefit employees?
Although the tax credit exclusively benefits companies, the WOTC program may benefit workers by opening up career prospects for those who might otherwise have difficulty finding employment. These people include veterans, ex-offenders, and people who get food stamps.

What is Form 8850 Work Opportunity Tax Credit?
Employers pre-screen candidates for targeted groups using Form 8850, then submit a written request to their state workforce agency (SWA) to certify the candidate as a member of that group for the purpose of being eligible for the work opportunity credit.

Is participation in the WOTC program mandatory?
It's a choice to participate in the Work Opportunity Tax Credit. Employers are not required to seek out WOTC-eligible candidates, and job seekers are not required to submit the WOTC eligibility form. Employers may continue to employ these people if they so want, but they will not be eligible for the tax credit.

What are the benefits of the Work Opportunity Tax Credit?
Tax credits can assist businesses in lowering their tax obligations, which may improve their bottom line. That holds true for any kind of business tax credit, including the work opportunity tax credit. Increasing diversity in recruiting is another benefit of the credit. From the standpoint of a worker, this tax credit may enable some groups that are typically excluded from the recruiting process to find employment.