Work Opportunity Tax Credit Program Extended Until 2025
The WOTC is a federal tax credit employers can receive for hiring individuals with barriers to employment.
Did you know that you can receive a federal tax credit by hiring people from certain marginalized groups? This credit is known as the Work Opportunity Tax Credit (WOTC), which is available through 2025.
WOTC background
Created in 1996 by the Small Business Job Protection Act, the WOTC program incentivizes employers to hire people who have consistently experienced substantial barriers to employment. This incentive comes in the form of a federal tax credit.
Eligible employers can claim the credit if they hire individuals from specific target groups, as defined by the Internal Revenue Service — which administers the WOTC program jointly with the Department of Labor.
Since 1996, the WOTC has been extended many times by Congress.
Stimulus 2.0 extends the WOTC
Prior to Congress passing the Consolidated Appropriations Act of 2021 (or Stimulus 2.0), the WOTC program was set to expire on December 31, 2020. As the deadline approached, it wasn’t clear whether Congress would extend the program. This uncertainty ended on December 27, 2020, when Stimulus 2.0 was signed into law.
Stimulus 2.0 contains a provision that extends the WOTC program through December 31, 2025.
Potential WOTC savings for employers
Per the DOL, “Each year, employers claim over $1 billion in tax credits under the WOTC program.”
Individually, employers may be able to lower their tax liability (via the WOTC) by as much as $9,600 per qualifying new hire.
To qualify, the new hire must be a member of an established target group.
Individually, employers may be able to lower their tax liability (via the WOTC) by as much as $9,600 per qualifying new hire. To qualify, the new hire must be a member of an established target group.
WOTC target groups
The following target groups are eligible for the WOTC:
- Qualified IV-A recipient — i.e., a person who is a member of a family receiving Temporary Assistance for Needy Families (TANF)
- Qualified Veteran
- Designated Community Resident — i.e., an eligible person living in a federally-designated empowerment zone, enterprise community, or renewal community
- Qualified Ex-Felon
- Vocational Rehabilitation Referral, for eligible individuals with a physical or mental disability
- Summer Youth Employee
- Supplemental Nutrition Assistance Program (SNAP) recipient
- Supplemental Security Income (SSI) recipient
- Long-term Family Assistance recipient
- Qualified Long-term Unemployment recipient
Certain individuals are excluded from the WOTC target groups, including rehired employees, business owners, and family members or dependents of the business owner.
Maximum credit
There is no cap on the number of people that employers can hire to claim the WOTC credit. However, there are limits on the amount of credit the employer can claim per eligible employee.
For most WOTC target groups, employers can claim a credit equal to:
- 40% of the employee’s qualified wages, if the employee works at least 400 hours during their first year of employment
- 25% of the employee’s qualified wages, if the employee works at least 120 hours but fewer than 400 hours in their first year of employment
The credit does not apply if the employee works less than 120 hours. Further, there is an exception for the TANF target group, which allows a credit of up to 50% on qualified wages if the employee works at least 400 hours during their second year of employment.
Generally speaking, the maximum WOTC per eligible employee ranges from $1,200 to $9,600, depending on the target group.
Generally speaking, the maximum WOTC per eligible employee ranges from $1,200 to $9,600, depending on the target group. Moreover, the credit applies only to the employee’s first-year or second-year wages, whichever is appropriate for the target group.
Non-Veteran target groups
For most non-veteran target groups, the maximum qualified wages is $6,000. So, if you hire an employee from one of those groups, your maximum credit is 25% or 40% of $6,000, depending on how many hours the employee worked.
Note: The maximum qualified wages for a Summer Youth Employee is $3,000, which limits this credit to $1,200 ($3,000 x 40%).
Veteran target groups
For veteran target groups, the maximum qualified wages ranges from $6,000 to $24,000, which caps this credit at $9,600 ($24,000 x 40%).
Claiming the WOTC credit
- Eligible taxable employers can claim the WOTC credit against their federal income tax liability. To claim this credit, file Form 5884, Form 3800, and your business’ related income tax return with the IRS.
- Qualified tax-exempt employers can claim the WOTC credit against their Social Security tax owed on qualified veterans. They cannot claim the credit for any other target group. To claim this credit, file Form 5884-C with the IRS.
To be able to use the credit, you must have a tax liability. If you have unused WOTC credits, you can carry them back 1 year, or carry them forward for up to 20 years (to reduce future tax payments).
WOTC application steps
- Give the job applicant IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to complete. The applicant must fill out the questionnaire on page 1 and return the completed form to you by the job offer date.
- Complete page 2 of Form 8850 by the date the job offer is made, if you believe the applicant is a member of a targeted group.
- Complete the appropriate DOL Employment and Training Administration (ETA) forms, which include ETA Form 9061 or ETA Form 9062 and, if applicable, ETA Form 9175.
- Submit the completed ETA document(s) and Form 8850 to the state workforce agency within 28 days of the new hire’s start date.
The state workforce agency will let you know whether the employee has met the eligibility requirements for the WOTC target group and is now a certified member of that group. Once you’ve secured the employee’s certification from the state, you can claim the WOTC credit from the IRS.
Participation and hiring considerations
Participating in the WOTC program may seem overwhelming at first, as the process does take some getting used to. Along with completing various forms and obtaining certification from the state, you must track employees’ work hours and qualified wages plus maintain accurate WOTC records. But once you get the hang of it, navigating the WOTC becomes smoother.
The promise of big savings is a compelling reason to join the program. However, don’t forget to thoroughly vet applicants, because you want people who are WOTC-eligible and right for the job.
When seeking applicants, consider checking with the state workforce agency or local unemployment agency. These agencies may be able to connect with you individuals who qualify for the job and the WOTC.
