The Work Opportunity Tax Credit Program

The Work Opportunity Tax Credit (WOTC) program is a federal tax credit that incentivizes employers to hire individuals from specific targeted groups who have faced significant barriers to employment. This program has been extended until December 31, 2025.

Key Points about WOTC

The WOTC program encourages employers to hire individuals from targeted groups with barriers to employment by offering a tax credit based on the category of workers, their wages in the first year of work, and the hours worked. Employers must obtain eligibility determination from their state workforce agency before applying for the tax credit. To claim the tax credit, employers need to submit an application form to the IRS along with their tax return.

Qualifications for WOTC

Employers must determine if a worker fits into specific categories to qualify for the Work Opportunity Tax Credit. These categories include qualified veterans, individuals receiving TANF or SNAP benefits, designated community residents, ex-felons, and more. Each category has specific qualifications, and not all workers are eligible, such as relatives or majority owners of the business.

How to Verify a Worker's Eligibility

During the hiring process, employers and applicants must complete IRS Form 8850 and DOL Form 9061 to verify eligibility for the WOTC. These forms must be submitted to the state workforce agency within 28 days of the employee starting work. Once the agency certifies eligibility, employers can claim the tax credit based on the worker's wages.

Calculating Wages for the Tax Credit

To qualify for the tax credit, employees must work at least 120 hours in their first year, and wages must be paid directly by the employer. The tax credit amount is based on a percentage of the employee's wages, with higher percentages for more hours worked. Wages used for the WOTC cannot be used for other tax credits.

Applying for the WOTC

After receiving eligibility confirmation from the state agency, employers can claim the tax credit by completing IRS Form 5884 or Form 3800, depending on their business type. The credit can be applied to the business's income tax liability for the year. Pass-through businesses include the WOTC on their individual tax returns.

FAQs

What is a WOTC screening? - A WOTC screening is the process employers use to determine if a potential hire qualifies for the tax credit based on hours worked and category of worker.

What does the WOTC do for the employee? - While employees hired under the WOTC program do not receive additional compensation, the program increases their chances of being hired and provides tax credits to the employer, ranging from $1,500 to $9,600 per qualified individual.