Building a diverse workforce and the strength of your bottom line are two of the most important priorities of most organizations. One way to do both is by taking advantage of the Work Opportunity Tax Credit. But what is the Work Opportunity Tax Credit (WOTC)? WOTC is a federal tax credit available to employers who hire employees from designated target groups, such as ex-felons, qualified veterans, and SNAP recipients.
Leveraging the power of tax credits like WOTC is a great way to enjoy financial savings and demonstrate your corporate social responsibilities by showcasing your commitment to hiring workers from historically disadvantaged groups. You can also maintain a competitive advantage in your marketplace while creating a diverse workforce that brings innovative ideas to projects and assignments.
So, is WOTC right for you, and if so, are you eligible? In our WOTC guide, we’ll walk through everything you need to know, including an in-depth definition of WOTC, eligibility requirements, common challenges, and answers to your most asked questions.
What is the Work Opportunity Tax Credit?
WOTC is a federal tax credit created to incentivize employers to hire and retain employees from designated target groups who have a history of facing significant barriers to employment. One of the primary goals of the Work Opportunity Tax Credit is to ensure diversity in the workplace by facilitating the access to good jobs throughout the country for American workers.
Eligibility Criteria
In order to claim WOTC, certain criteria must be met. First, you must be in a taxable situation because the credit offsets federal income tax liability. Federal, state, and local government employers are typically not eligible to claim WOTC. Next, eligible employers must hire individuals who meet the demographic parameters of one or more of the WOTC target groups.
Take a look at who qualifies for the Work Opportunity Tax Credit:
Qualified IV-A Recipient
Under the Work Opportunity Tax Credit, a qualified IV-A recipient is an individual who is a member of a family that is receiving assistance under a state-sponsored program funded under part A of Title IV of the Social Security Act. This state-sponsored program must relate to Temporary Assistance for Needy Families (TANF), and the assistance must be received for any nine months during the 18-month period before the hiring date.
Qualified Veteran
A qualified veteran under the WOTC is a veteran who meets any of the following eligibility criteria:
- A member of a family that has received assistance under the Supplemental Nutrition Assistance Program (SNAP) for at least three months within the 15 months before their hiring date.
- Unemployed for at least four weeks (consecutive or not) but less than six months in the one-year period before their hire date.
- Unemployed for six months (consecutive or not) one year before their hiring date.
- Entitled to compensation for a service-related disability and hired within one year of being discharged or released from active duty in the U.S. Armed Forces.
- Entitled to compensation for a service-related disability and unemployed for at least six months (consecutive or not) in the one year before their hire date.
Qualified Ex-Felon
A qualified ex-felon is an individual who was either convicted of a felony released from prison for a felony within one year of being hired.
Designated Community Resident
A designated community resident (DCR) is an individual who is at least 18 years old and under 40 years old and has a primary residence in either an Empowerment Zone (EZ) or a Rural Renewal County (RRC). Additionally, it’s important to note these individuals must reside in this residence after employment, and wages paid for services performed when the individual’s principal residence is outside an EZ or RRC are not eligible.
Vocational Rehabilitation Referral
An individual who has a physical or mental disability and has been referred to the employer while receiving or upon completing rehabilitation services is considered a vocational rehabilitation referral. Rehabilitation services include a state plan approved under the Rehabilitation Act of 1973, an Employment Network Plan under the Ticket to Work program, or a program administered by the Department of Veteran Affairs.
Qualified Summer Youth Employee
Another WOTC target group is qualified summer youth employees at least 16 years old but under 18 on May 1 or the hiring date, whichever comes later. Additionally, qualified summer youth employees must only perform services for their employer between May 1 and September 15 and live in an Empowerment Zone.
Qualified Supplemental Nutrition Assistance Program (SNAP) Benefits Recipient
Individuals are considered qualified SNAP benefits recipients if they are at least 18 years old and under 40 years old and a family member who received SNAP benefits for either the previous six months or at least three months of the past five months.
Qualified Supplemental Security Income (SSI) Recipient
A qualified SSI recipient is an individual who has received SSI benefits for any month within the 60-day window that ends on the date they were hired.
Long-Term Family Assistance Recipient
An individual is considered a long-term family assistance recipient under WOTC if they, at the time of hiring, are a member of a family that meets one of the following conditions:
- Received assistance under an IV-A program for at least the previous 18 consecutive months.
- Received assistance under an IV-A program for a total of 18 months starting after 8/5/1997, and it has been no more than two years since the end of the earliest of such 18-month periods.
- Lost eligibility for assistance under an IV-A program due to a federal or state law limiting the maximum duration of payments, and it has been no more than two years since the discontinuation of such assistance.
Qualified Long-Term Unemployment Recipient
A qualified long-term unemployment recipient is an individual who has been unemployed for 27 consecutive weeks or longer at the time of hiring and has received unemployment compensation during some or all of their period of unemployment.
How to Apply for WOTC
In order to claim the WOTC on a qualified individual, that individual must be certified by the State Workforce Agency (SWA), who verifies the individual’s eligibility. In order to obtain this certifiication, in addition to meeting the criteria of one or more of the groups, the candidate must provide information verifiying his or her eligibility, which is required to be done on or before the day an offer of employment is made, and then the required documentation must then be provided to the SWA within 28 days of that individuals start of employment. The forms required to be provided include:
- Complete IRS Form 8850, Prescreening Notice and Certifications Requests for the Work Opportunity Tax Credits: First, new hires must complete page 1 of Form 8850 prior to the date of their job offer and the employer completes page 2. Both must attest that the information contained on the form was provided on or before the day an offer was extended.
- IRS Form 9061, Individual Characteristics Form, or IRS Form 9062, Conditional Certification Form: Next, new hires must complete either Form 9061 or Form 9062.
Benefits of WOTC
The Work Opportunity Tax Credit offers a variety of advantages for employers who hire individuals from target groups facing significant barriers to employment. This credit provides valuable benefits, including:
- Tax savings: One of the top benefits for employers taking advantage of WOTC is reducing their tax liability. WOTC is a tax credit that directly decreases the taxes owed, thus increasing earnings and cash flow.
- Workplace diversity: Both employers and employees can benefit from a more diverse workplace, as WOTC incentivizes employers to hire individuals coming from target groups that have faced a history of poverty and unemployment due to circumstances out of their control.
- Innovation: Hiring employees from a diverse pool of candidates can help bring in new perspectives and ideas to the workplace, fostering a greater sense of creativity and innovation that leads to enhanced business performance.
- Workforce development: While employers may be reluctant to hire from target groups due to a lack of training, doing so encourages the development of a skilled and diverse workforce by providing opportunities to those who might struggle to find work.
- Cost offset: WOTC can also offset some of the hidden costs that come with recruiting, hiring, and training new employees.
- Improved reputation: Employers hiring from WOTC target groups can enhance their public image by demonstrating their commitment to hiring individuals from disadvantaged backgrounds.
Challenges and Solutions
There are several challenges that can present themselves during the process of claiming WOTC. To start, claiming WOTC is voluntary means many organizations might not realize they’re hiring individuals who can save them money through a tax credit. Additionally, claiming WOTC can be labor intensive and requires the knowledge and experience of HR or payroll professionals who understand the eligibility criteria for WOTC. Completing manual paper applications and meeting the 28-day deadline can be difficult, especially for organizations without the right resources and personnel.
To overcome these challenges, employers can optimize their WOTC screening and management by leveraging automated systems that streamline this time-consuming and complicated task. With simplified data collection and an intuitive user experience that makes it easy for employees to qualification questionnaire, employers can receive a higher WOTC participation rate among their candidates. Screening solutions also serve as a centralized repository that keeps all onboarding information for employees in one location for easy access.
FAQs:
Should I fill out the Work Opportunity Tax Credit questionnaire?
If you’re applying for a job and the company you’re applying to requests your completion of a WOTC questionnaire, filling out the information helps determine if you belong to an eligible target group. This may qualify your future employer for the tax credit which could be a benefit to you as WOTC incentivizing companies to hire individuals from groups that have historically faced barriers to employment.
Who benefits from WOTC?
Both employers and employees benefit from WOTC. Employers can benefit from a tax credit for hiring individuals from eligible target groups, which helps lower their federal tax liability. For potential employees, it enhances employment opportunities, particularly for those who may face barriers to employment.
How does WOTC affect employees?
WOTC boosts job opportunities and stability for target group employees while fostering workplace diversity. This diversity brings varied perspectives that drive innovation and growth for all employees.
Does WOTC reduce wages?
No, WOTC does not reduce wages. It is a federal tax credit given to employers that is not deducted from employees’ wages. It does not effect an employees wages or taxes in any way.
What is the average credit for WOTC?
The amount an employer can receive from WOTC for each eligible employee varies based on a number of factors like the number of hours worked, wages paid and employee average tenure. For most organizations, the average value per certified individual provides a significant finanical return for participating in the program.
What is the maximum tax credit for WOTC?
WOTC varies by target group, hours worked, and wages paid. However, the maximum credit to the employer is $2,400 per employee for most categories, but can be as high as $9,600 per employee for Qualified Veterans.
