Work Opportunity Tax Credit for employers and employees
The Work Opportunity Tax Credit (WOTC) is a federal tax credit designed to encourage employers to hire individuals from groups with employment barriers.
The Work Opportunity Tax Credit delivers financial advantages for small businesses and plays a crucial role in fostering workplace diversity. It helps businesses create more inclusive work environments and contributes to social welfare by providing employment opportunities to those who need them most.
In this article, you will learn how the Work Opportunity Tax Credit works, who is eligible for it, and how to claim it.
What is the Work Opportunity Tax Credit (WOTC)?
The WOTC is a federal tax credit established by the US government to encourage employers to hire individuals from certain groups who have historically faced obstacles to securing employment.
Introduced as part of the Small Business Job Protection Act of 1996, the WOTC aims to help individuals from targeted groups access meaningful employment.
In 2021, the WOTC was extended until December 31, 2025.
What are the benefits of WOTC?
WOTC for employers
With the WOTC, employers can save up to $2,400 per qualifying employee on federal income tax. Generally, it equals 40% of the first $6,000 of the employee’s first-year wages.
If you often hire people from the targeted groups, this can lead to significant savings because there's no limit on how many employees you can claim.
WOTC for employees
The WOTC offers increased job opportunities for certain groups facing higher unemployment rates, such as veterans, individuals receiving Temporary Assistance for Needy Families (TANF), ex-felons, and others.
By incentivizing employers to hire individuals from these groups, the WOTC enhances their employment opportunities and economic stability.
Who qualifies for the WOTC?
The WOTC targets specific groups that face challenges in the job market:
- the formerly incarcerated or those previously convicted of a felony
- recipients of state assistance under part A of title IV of the Social Security Act (SSA)
- veterans
- residents in areas designated as empowerment zones or rural renewal counties
- individuals referred to an employer following completion of a rehabilitation plan or program
- individuals whose families are recipients of supplemental nutrition assistance under the Food and Nutrition Act of 2008
- recipients of supplemental security income benefits under title XVI of the SSA
- individuals whose families are recipients of state assistance under part A of title IV of the SSA
- individuals experiencing long-term unemployment
Source: Internal Revenue Service.
Who can claim the WOTC?
Taxable employers
Businesses of any size can claim the WOTC if they hire employees from the targeted groups and receive proper certification.
Taxable employers can use the WOTC to reduce their federal income tax liability.
Tax-exempt organizations
Nonprofit organizations can also benefit from the WOTC. Still, the credit is only applicable against their payroll taxes and only for wages paid to qualified veterans. This provision allows tax-exempt employers to support veterans while reducing their tax burden.
The WOTC is advantageous for industries that often hire from targeted groups, such as construction, hospitality, and manufacturing.
To claim the WOTC, employers must receive certification from the State Workforce Agency (SWA) confirming that the employee is from a targeted group. The SWA is responsible for verifying the employee's eligibility and issuing the necessary certification. Certification forms must be submitted to the SWA within 28 days of the eligible employee's start date to qualify.
What forms do you need to claim the WOTC?
1. Form 8850: Pre-Screening Notice and Certification Request for the credit. The employer and the job applicant must complete this form on or before the job offer date and submit it to the SWA within 28 days of the employee's start date.
2. DOL Form ETA 9061 or ETA 9062:
- ETA 9061 (Individual Characteristics Form): This form is completed when no conditional certification is provided.
- ETA 9062 (Conditional Certification Form): The form is provided if the applicant has been pre-certified as a target group member.
3. Form 5884: Work Opportunity Credit. This form calculates the WOTC credit based on the certified employees' wages and hours. Attach this form to the employer's federal income tax return.
4. Form 3800: General Business Credit. Form 3800 claims the general business credits, including the WOTC. Attach this form to the employer's federal income tax return along with Form 5884.
5. Form 5884-C: Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. It is used to calculate and claim the WOTC against the employer's share of Social Security tax for hiring qualified veterans. This form is filed separately from the employment tax return.
How to claim the WOTC?
Pre-screening and certification
- Complete Form 8850: Fill out the pre-screening notice with the job applicant on or before the job offer date.
- Fill out DOL Forms ETA 9061 or ETA 9062: Complete the appropriate form based on whether the applicant has a conditional certification.
- Submit to SWA: Send Form 8850 and the appropriate ETA form to the designated SWA within 28 days of the employee's start date.
Track employee hours and wages
To accurately calculate the credit, maintain detailed records of the hours worked and wages paid to the certified employees.
Calculate the credit
- Complete Form 5884 (for taxable employers): Calculate the WOTC based on the certified employees' wages and hours. Attach Form 5884 to your annual federal income tax return.
- Complete Form 5884-C (for tax-exempt organizations): Calculate the WOTC for qualified veterans. File Form 5884-C separately after submitting the employment tax return for the relevant period.
Claim the General Business Credit (for taxable employers only)
Fill out Form 3800 to summarize your business credits, including the WOTC. Attach it to your federal income tax return along with Form 5884.
Submit annual tax return
- Attach forms: Make sure Form 5884 and Form 3800 (for taxable employers) are attached to your federal income tax return.
- File the return: Submit your federal income tax return to the IRS by the due date.
For tax-exempt organizations, file Form 5884-C separately after filing your employment tax return for the period.
Bottom line
The Work Opportunity Tax Credit (WOTC) is a valuable program for employers and employees. It provides significant tax savings for large and small businesses and promotes diversity and inclusion.
Claiming the WOTC requires following specific steps and submitting everything on time. It is crucial to obtain certification from the State Workforce Agency and maintain accurate records.
Consult with a tax professional to get guidance on forms, deadlines, and documentation and fully benefit from the Work Opportunity Tax Credit while remaining compliant with all regulations.
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The Work Opportunity Tax Credit (WOTC) is a federal tax credit established by the US government to encourage employers to hire individuals from certain groups who have historically faced obstacles to securing employment. It was introduced as part of the Small Business Job Protection Act of 1996 and aims to help individuals from targeted groups access meaningful employment.
The WOTC targets specific groups that face challenges in the job market, including the formerly incarcerated or those previously convicted of a felony, recipients of state assistance under part A of title IV of the Social Security Act (SSA), veterans, and residents in designated empowerment zones or rural renewal counties. Check out the full list of targeted groups here.
For employers, the WOTC can save up to $2,400 per qualifying employee, generally equaling 40% of the first $6,000 of the employee’s first-year wages. No limit exists on how many employees an employer can claim the credit, leading to potentially significant savings. Talk to a tax professional to discuss how your business can use the WOTC.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Always consult with a tax professional regarding your specific case.
Susan Turcotte, a seasoned CPA with over 45 years of accounting experience, holds a Bachelor's in Accounting and a Master's in Taxation from Bryant College. See more
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