The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers who hire individuals from eligible target groups with significant barriers to employment. Each year, employers claim over $1 billion in tax credits under the WOTC program. The success and growth of this income tax credit for business is beneficial for all who participate, while increasing America’s economic growth and productivity.
WOTC joins other workforce programs that incentivize workplace diversity and facilitate access to good jobs for American workers.
- WOTC reduces an employer’s cost of doing business, requires little paperwork, and applying for WOTC is simple.
- WOTC can reduce an employer’s federal income tax liability by as much as $9,600 per employee hired.
- There is no limit on the number of individuals an employer can hire to qualify to claim the tax credit.
- Certain tax-exempt organizations can take advantage of WOTC by hiring eligible veterans and receiving a credit against the employer’s share of Social Security taxes.
WHO IS ELIGIBLE?
- TANF Recipients
- SNAP (food stamp) Recipients
- Designated Community Residents
- Vocational Rehabilitation Referral
- Supplemental Security Income Recipients
- Summer Youth Employee
- Qualified Long-Term Unemployment Recipient
HOW MUCH IS THE TAX CREDIT?
Employers can earn a tax credit of between $1,200 and $9,600 per employee, depending on the target group of the new employee and the number of hours worked in the first year. Employees must work at least 120 hours in the first year of employment to receive the tax credit.
HOW ARE THE TAX CREDITS CALCULATED?
Employers generally can earn a tax credit equal to 25% or 40% of a new employee's first-year wages, up to the maximum for the target group to which the employee belongs. Employers will earn 25% if the employee works at least 120 hours and 40% if the employee works at least 400 hours.
What are the Maximum Tax Credit Amounts?
The maximum tax credit amounts depend on the new employee's target group and the number of hours worked during the first year of employment. Click here for the maximum tax credits associated with each WOTC target group.
Note: There is no limit on the number of credits a business can claim.
HOW TO APPLY FOR WORK OPPORTUNITY TAX CREDIT? (WOTC)
- Complete IRS Form 8850 by the day the job offer is made. Instructions to use Form 8850 can be found here.
- Complete ETA Form 9061, or complete ETA Form 9062 if the employee has been conditionally certified as belonging to a WOTC target group by a State Workforce Agency, Vocational Rehabilitation agency, or another participating agency.
- Submit the completed and signed IRS and ETA forms to your State Workforce Agency. Forms must be submitted within 28 calendar days of the employee’s start date.
- Wait for final determination from your State Workforce Agency. The determination will indicate whether the employee is certified as meeting the eligibility for one of the WOTC target groups.
- After the target group employee is certified by the State Workforce Agency, file for the tax credit with the Internal Revenue Service.
States may accept applications via mail, fax, or e-mail or may have an automated WOTC process that accepts electronic submissions. If you are not sure how your state accepts applications, contact your state WOTC coordinator, or view a chart on state submission methods.
Glassdoor’s recent article “How to Hire Veterans”, provided excellent tips and advice to employers. They reported there are over 21 million veterans of the US armed forces in the United States, and enter the workforce armed with a variety of skills for employers should benefit from.
Veterans are not only cooperative, skilled and valuable members of a team, employers may be able to receive tax credits for hiring veterans using the WOTC program.
There are forms to complete and deadlines to meet. Initially the forms and process is new and so appears more daunting than it is. Once the process is in place, it is not complicated nor difficult to execute. A frequent first response is often “too complicated” or “not worth it”. If you hire 10 employees who qualify for WOTC and the tax credit for each averaged $2,400, the additional $24,000 becomes a compelling reason to change the process for hiring staff.
HOW DOES WOTC WORK?
The tax credit employers can claim depends upon the target group of the individual hired, the wages paid to that individual in the first year of employment, and the number of hours that individual worked. There is also a maximum tax credit that can be earned.
Generally, it is equal to the worker’s first-year wages up to $6,000 if he or she works at least 400 hours during the year, for a maximum credit of $2,400 per worker. For disabled veterans, the credit may be claimed for the first $24,000 of wages, for a maximum credit of $9,600 per worker.
For the long-term Temporary Assistance for Needy Families (TANF) target group only, the credit is available to employers who hire members of this group for up to a two-year period.
- In the first year, the employer may claim a tax credit equal to 40% of the first-year wages, up to the maximum tax credit, if the individual works at least 400 hours.
- In the second year, the employer may claim a tax credit equal to 50% of the second-year wages, up to the maximum tax credit, if the individual works at least 400 hours.
For all other target groups, the credit is available to employers who hire members of these groups, based on the individual's hours worked and wages earned in the first year.
- If the individual works at least 120 hours, the employer may claim a tax credit equal to 25% of the individual's first year wages, up to the maximum tax credit.
- If the individual works at least 400 hours, the employer may claim a tax credit equal to 40% of the individual's first year wages, up to the maximum tax credit.
Work Opportunity Tax Credit: A Video Tutorial for Employers
WOTC Program Reauthorization
On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) that extends and modifies the WOTC Program and the Empowerment Zones. In summary, the PATH Act:
- Retroactively reauthorizes the WOTC program target groups for a five-year period, from December 31, 2014 to December 31, 2019.
- Extends the Empowerment Zones for a two-year period, from December 31, 2014 to December 31, 2016.
- Introduces a new target group, Qualified Long-term Unemployment Recipients, for new hires that begin to work for an employer on or after January 1, 2016 through December 31, 2019.
IRS Notice 2016-22 is available here: https://www.irs.gov/pub/irs-drop/n-16-22.pdf and IRS Notice 2016-40 is available here: https://www.irs.gov/pub/irs-drop/n-16-40.pdf. For further information, view TEGL 25-15 Work Opportunity Tax Credit 2015 Reauthorization.
“EMPLOYER’S GUIDE TO THE WORK OPPORTUNITY TAX CREDIT”
Wearing too many hats may have you and your team already overwhelmed? If you are interested in learning how to optimize your tax opportunities, we can help.
Are you interested in hiring vets? Reach out to DAK Resources here.