The Work Opportunity Tax Credit

The Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers for hiring and employing individuals from certain targeted groups who have faced significant barriers to employment. The Consolidated Appropriations Act of 2021 (Section 113 of Division EE P.L. 116-260) authorized the extension of this credit until December 31, 2025.

What is the Work Opportunity Tax Credit?

The WOTC is a general business credit provided under Section 51 of the Internal Revenue Code administered by the Internal Revenue Service (IRS) and the Department of Labor (DOL). Employers of all sizes are eligible to claim the credit, including both taxable and certain tax-exempt employers in the United States, and in certain U.S. territories.

In general, the WOTC is equal to 40% of up to $6,000 of wages paid to or incurred on behalf of an individual who:

  • Is in their first year of employment
  • Is certified as being a member of a targeted group
  • Performs at least 400 hours of services for that employer

Who Are the Targeted Groups for the Credit?

An employer is eligible for the WOTC credit if they hire and pay or incur wages to certain individuals who are certified by a designated local agency as being a member of one of 10 targeted groups. These groups are:

  1. Qualified IV-A recipient, members of families that receive assistance under the Temporary Assistance for Needy Families (TANF) program
  2. Qualified Veteran
  3. Qualified Ex-Felon
  4. Designated Community Resident (DCR)
  5. Vocational Rehabilitation Referral
  6. Qualified Summer Youth Employee
  7. Qualified Supplemental Nutrition Assistance Program (SNAP) Benefits Recipient
  8. Qualified Supplemental Security Income (SSI) Recipient
  9. Long-Term Family Assistance Recipient
  10. Qualified Long-Term Unemployment Recipient

Tax Credit Amounts and Limitations on the Work Opportunity Tax Credit

Employers generally 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. The maximum tax credit is usually $2,400. A 25% rate applies to wages for individuals who perform less than 400 but at least 120 hours of service for the employer. In determining the WOTC for certain qualified veterans, up to $24,000 in wages may be considered. Employers cannot claim the tax credit for employees who are rehired.

The WOTC is limited to the Social Security tax owed or the amount of the business income tax liability. A taxable business can apply the credit against its business income, while taxable employers can carry the current year’s unused WOTC back one year and then forward 20 years. For qualified tax-exempt organizations, the credit is limited to the amount of employer Social Security tax owed on the total taxable social security wages and tips reported by the organization for the employment tax period for which the credit is claimed.

How Does the Employer Claim the Work Opportunity Tax Credit?

Employers must pre-screen and obtain certification that an employee is a member of a targeted group from the appropriate State Workforce Agency (SWA) to claim the credit. On or before the day that a job offer is made, a prescreening notice must be completed by the job applicant and the employer.  To determine if the employee qualifies, employers must submit IRS Form 8850, ETA Form 9061 or ETA Form 9062 to their local SWA. These forms need to be submitted within 28 calendar days after the new hire’s start date. If the new hire is eligible, the employer will receive a certification (ETA Form 9063) from their SWA.

Taxable employers can claim the credit as a general business credit against their income taxes. Tax-exempt employers who hire Qualified Veterans can claim the credit against their payroll taxes.

If you have any questions on the WOTC, please contact your BSSF advisor.

Posted In: Human Resources Consulting | Insights

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