Enacted in 1996, the Work Opportunity Tax Credit (WOTC) is a federal tax credit that eligible employers can claim if they hire eligible individuals who have consistently faced stringent barriers to employment. According to the Department of Labor, “Each year, employers claim over $1 billion in tax credits under the WOTC program.”
Since 1996, Congress has frequently reauthorized the WOTC. The latest reauthorization occurred via the Consolidated Appropriations Act, 2021, which includes COVID-19 stimulus relief and extends the WOTC until December 31, 2025.
Employers can claim the WOTC only for individuals who qualify as a member of one of the following target groups:
- Qualified Veteran.
- Qualified Ex-Felon.
- Qualified IV-A Recipient, meaning the individual is a member of a family that receives Temporary Assistance for Needy Families (TANF).
- Designated Community Resident (DCR).
- Supplemental Nutrition Assistance Program (SNAP) Recipient.
- Vocational Rehabilitation Referral, for individuals with a disability.
- Summer Youth Employee.
- Long-Term Family Assistance Recipient.
- Supplemental Security Income (SSI) Recipient.
- Qualified Long-Term Unemployment Recipient.
Determining WOTC Credit Amounts
You can claim the WOTC for any number of eligible employees. The minimum credit per eligible employee is $1,200 and the maximum credit is $9,600. The exact amount depends on the target group plus the individual’s qualified wages and work hours. Typically, employers can take a credit of:
- 40% of qualified first-year wages, if the employee works at least 400 hours in his or her first year of employment.
- 25% of qualified first-year wages, if the employee works at least 120 hours but no more than 400 hours in his or her first year of employment.
An exception applies to the TANF target group, which permits a credit of 50% of qualified wages earned during the second year of employment if the employee works at least 400 hours.
Claiming the WOTC
You cannot claim WOTCs from the Internal Revenue Service (IRS) unless the state workforce agency has already certified the individual as a member of a WOTC target group.
To request this certification:
- Give the job applicant IRS Form 8850 (prescreening form) to fill out.
- Complete page 2 of Form 8850 and applicable DOL Employment Training and Administration (ETA) forms.
- Send the completed Form 8850 and ETA form(s) to the state workforce agency no later than 28 days after the new hire’s start date.
If the state workforce agency deems the new hire a member of a WOTC target group, it will notify you that the individual has been certified as such.
The next step is to claim your WOTC from the IRS if the employee satisfies the work hours requirement. Keep in mind that you must have a federal tax liability in order to claim the credit, and the IRS has separate instructions for taxable and tax-exempt employers.
Visit the Department of Labor website to learn more.
As we have been doing with all coronavirus legislation and IRS and SBA guidance during these past several months, we will be sure to update you with any additional insight as soon as possible. Continue to check back here for the most up to date tax information and changes in response to coronavirus. Click here for all of your coronavirus resources. If you have questions about this or related topics contact an MCB Advisor at 703-218-3600 or click here.
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