Work Opportunity Tax Credit (WOTC)

What is the Work Opportunity Tax Credit?

The Work Opportunity Tax Credit (WOTC) is defined by the U.S. Department of Labor as a tax credit available to employers who hire individuals from targeted groups that have consistently faced barriers to employment.

Key Takeaways

For most target groups, WOTC is available only for the first year of employment
The form must be completed before or on the date of extending a job offer, and it must be submitted within 28 days of the employee’s start date
You will only receive the tax credit at the end of the year, provided that the employee has worked 400 or more hours for your company

What is the Work Opportunity Tax Program?

The Work Opportunity Tax Program is an incentive provided by the U.S. government to employers in the form of tax credit, as a way to encourage the involvement of target groups in the workforce.

The goal is to provide individuals who have faced (or still face) barriers to employment with more opportunities to earn stable, consistent income.

Employers are eligible for this tax credit if they hire and pay or incur wages for one or more individuals who are certified by a designated local agency to belong to one of the 10 targeted groups (explained below).

The WOTC is available for employers of all sizes, including both taxable and certain tax-exempt employers. In the case of the latter, the employer can only claim WOTC against payroll taxes.

The WOTC is typically equal to about 40% of up to $6,000 of wages paid to an individual who is a certified member of a targeted group and:

Is in their first year of employment
Works at least 400 hours for the employer

In other words, employees are reimbursed for the first year of employment for new hires from the targeted groups, but not for every year thereafter.

WOTC Targeted Groups

The 10 WOTC targeted groups, as defined by the IRS, include:

Qualified IV-A Recipients — A member of a family receiving assistance under a state program funded under part A of Title IV of the Social Security Act relating to Temporary Assistance for Needy Families (TANF). To qualify, the assistance must be received for any 9 months during the 18 months before the hiring date.
Qualified Veterans — Veterans under SNAP, unemployed veterans, and veterans entitled entitled to compensation for a service-connected disability
Qualified Ex-Convicts — A person hired within a year of being convicted for a felony or being released from prison for a felony
Designated Community Residents (DCR) — Individuals between 18 and 40 with a principal residence in An Empowerment Zone (EZ) or A Rural Renewal County (RRC)
Vocational Rehabilitation Referrals — A person with a physical or mental disability, who has been referred to the employer while receiving or after completing rehabilitation services
Qualified Summer Youth Employees — A seasonal worker older than 16 but younger than 18 on the date of hiring or by May 1st, whichever is later. Additional requirements are that the employee only performs work between May 1st and September 15th and resides in an Empowerment Zone (EZ).
Qualified Supplemental Nutrition Assistance Program (SNAP) Benefit Recipients — A person between 18 and 40 who received SNAP benefits for 6 months before being hired or 3 out of the previous 5 months
Qualified Supplemental Security Income (SSI) Recipients — A qualified SSI recipient who has received SSI benefits for one month within the 60 days before their hiring date
Long-Term Family Assistance Recipients — An individual who is a member of a family that received assistance under an IV-A program for 18 consecutive months, for 18 months beginning after 8/5/1997 (provided the assistance hasn’t ended within 2 years of the hiring date), or ceased to be eligible for assistance within 2 years before the hiring date.
Qualified Long-Term Unemployment Recipients — Individuals who have been unemployed for 27 consecutive weeks or longer, and who received unemployment compensation during the unemployment period

How to Claim the Work Opportunity Tax

Suppose you have new hires that fall within one of the ten targeted groups explained above. In that case, you and the applicant must fill out Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit) on or before the day an employment offer was made. As an employer, you’ll have 28 days to submit the completed form to the designated local agency in your state before they can be enrolled in your payroll software.

Remember that additional forms may be required by the U.S. Department of Labor (DOL) to obtain certification that the new hire is part of a targeted group. If the qualified employee meets the required hours (400+ out of the yearly average of 2,080), you will be approved to receive a tax credit at the end of the year.