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Work Opportunity Tax Credit
Everything You Need to Know
As an employer, building a diverse workforce and the strength of your bottom line are some of the top responsibilities on your plate. One way to do both is by taking advantage of the Work Opportunity Tax Credit. But what is Work Opportunity Tax Credit (WOTC)? The 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 the Work Opportunity Tax Credit 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 the Work Opportunity Tax Credit 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 the Work Opportunity Tax Credit, eligibility requirements, common challenges, and answers to your most asked questions.
What is the Work Opportunity Tax Credit?
The Work Opportunity Tax Credit 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. Any taxable employer or qualified tax-exempt organization who hires an employee from a target group is eligible to apply and claim this tax credit.
Eligibility Criteria
In order to claim the Work Opportunity Tax Credit, eligibility criteria must be met. First, you must be a taxable employer or tax-exempt organization. Federal, state, and local government employers are typically not eligible to claim the WOTC. Next, eligible employers must hire individuals who come from a WOTC target group.
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 the 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
Once you’ve determined an employee falls under one of the WOTC target groups, the next step is to apply. Prior to applying, you must receive a certification from your State Workforce Agency (SWA) that states a new hire is a member of a qualifying target group to claim the WOTC on your federal tax return. Then, to apply for the WOTC, you must:
- 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.
- IRS Form 9061, Individual Characteristics Form, or IRS Form 9062, Conditional Certification Form: Next, new hires must complete either Form 9061 or Form 9062.
Filing: Once all the aforementioned forms are complete, employers must mail them to their SWA within 28 days of the new hire’s start date.
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 the WOTC is saving money come tax time. The WOTC is a tax credit that directly decreases the taxes owed.
- Workplace diversity: Both employers and employees can benefit from a more diverse workplace, as the 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: The 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 the WOTC. To start, claiming the WOTC is voluntary means many organizations might not realize they’re hiring individuals who can save them money through a tax credit. Additionally, claiming the WOTC can be labor intensive and requires the knowledge and experience of HR or payroll professionals who understand the eligibility criteria for the 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 complete their applications, employers can receive a higher WOTC questionnaire completion rate. Screening solutions also serve as a centralized repository that keeps all onboarding information for employees in one location for easy access.
If you’re applying for a job, then yes, you should fill out and complete the Work Opportunity Tax Credit questionnaire. Doing so helps determine if you belong to a target group eligible for the WOTC, which can help your employer qualify for the tax credit. This will then incentivize them to hire individuals from groups that have historically faced barriers to employment.
Both employers and employees benefit from the WOTC. Employers can benefit from a tax credit for hiring individuals from eligible target groups, which helps lower their federal tax liability. Employees can gain greater employment opportunities, particularly those who may face barriers to employment.
The 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.
No, the WOTC does not reduce wages. It is a federal tax credit given to employers that is not deducted from employees' wages.
The amount an employer can receive from the WOTC for each eligible employee varies based on factors like the number of hours worked and wages paid. However, the overall average credit most employers can claim is $2,400.
The WOTC tax credit varies by target group, hours worked, and wages paid. Generally, it’s 40% of up to $6,000 in wages, or $2,400. For qualified veterans, it can be up to $24,000 in wages, totaling $9,600.