What is the Work Opportunity Tax Credit?
This article was last edited on 09/09/2019. For updated information on WOTC, visit https://www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit.
The Work Opportunity Tax Credit (WOTC) benefits targeted workers and their employers. It helps employees become self-sufficient by earning a steady income. It helps employers reduce the company’s income tax liability and lower their cost of doing business. The Protecting Americans from Tax Hikes Act of 2015 (PATH) extended the WOTC program and empowerment zones through December 31, 2019.
How much is the tax credit?
In general, the tax credit is 40% of the qualified wages (usually limited to the first $6,000 your team member makes) during the employee’s first year of employment, if the staff member works 400 hours or more. If they work between 120 hours and 400 hours, the tax credit is 25% of their qualified wages during their first year.
If your business is tax-exempt, you can still take advantage of the WOTC by hiring qualified veterans and receiving a credit against your share of their Social Security tax.
Read also: A Beginner’s Guide to Social Security Taxes
WOTC targeted groups
Employers can receive a tax credit if they hire people from the following groups:
- Designated community residents who are 18 to 39 years old and live in a rural renewal county or empowerment zone
- Ex-felons if their hiring date is within one year of their conviction and release from prison
- Qualified veterans if they’ve been active in the military for more than 180 days, have been discharged for a service-connected disability, and have not had a period of active duty of more than 90 days that ended during the 60 days before the hiring date. They also must
- be a member of a family that received SNAP benefits for three or more months during the last 15 months
- be disabled and entitled to compensation for a service-connected disability and
- were hired within one year of their discharge or release from active duty or
- were unemployed for at least six months during the previous year
- have been unemployed for
- at least four weeks in the year ending on the hiring date or
- at least six months in the year ending on the hiring date
- Supplemental Nutrition Assistance Program (SNAP) recipients who are between 18 and 39 years old and received benefits for
- the six months ending on their hiring date or
- at least three of the last five months
- Supplemental Security Income (SSI) recipients if they’ve received SSI benefits for any month in the previous 60 days
- Summer youth employees who are 16 or 17 years old, live in an empowerment zone, and work between May 1 and September 15
- Long-term Temporary Assistance for Needy Families (TANF) recipients if they have
- received TANF benefits for at least the last 18 consecutive months
- have received TANF benefits for at least 18 consecutive or non-consecutive months and are hired not more than two years after the end of the earliest 18 months
- have stopped being eligible for TANF payments during the past two years because federal or state law limited the maximum time those payments could be made
- Short-term TANF recipients if they received TANF benefits for any nine-month period during the last 18 months
- Vocational rehabilitation recipients who have a mental or physical disability and are referred to you while completing rehabilitation services or within two years of completing rehabilitation services
If you rehire a former employee, you won’t qualify for WOTC again – no matter how long it’s been since the person last worked for you.
Four steps to apply for WOTC
During the interviewing and application process, you can ask questions to determine if a candidate is a member of a targeted group. The Equal Employment Opportunity Commission (EEOC) gives WOTC employers a “federal laws defense,” which protects them from EEOC violations when inquiring about a group member’s status. Only use that information for the WOTC application – not as a deciding factor when hiring.
After deciding to hire a member of a targeted group, take the following steps to apply for the tax credit:
- By the day you make a job offer, have the applicant complete page 1 of Form 8850, Pre-Screening Notice and Certification Request for Work Opportunity Credit.
- After you’ve hired a member of a targeted group, complete page 2 of Form 8850.
- Complete Form 9061, Individual Characteristics Form (ICF). If a state workforce agency (SWA) or Vocational Rehabilitation agency has conditionally certified your new employee as a member of a targeted group, complete Form 9062, Conditional Certification, instead of Form 9061.
- Submit Forms 8850 and 9061 (or 9062) to your SWA. You must submit these forms within 28 calendar days of your new hire’s start date.