With the tight job market, businesses are looking for new strategies to find and retain essential workers. The federal work opportunity tax credit (WOTC) can help businesses offset wages to allow employers to offer more competitive salaries and to tap into a pool of workers that may be unemployed and currently available.
Credit Basics
The credit ranges between $2,400 and $9,600 for each eligible employee depending on whether they are veterans, disabled, or family assistance recipients. The credit is equal to 40% of up to $6,000 of wages paid to an individual who:
- is in their first year of employment;
- is certified as being a member of a targeted group; and
- performs at least 400 hours of services for that employer.
The maximum tax credit is $2,400, with some exceptions. A 25% rate applies to wages for individuals who perform fewer than 400 but at least 120 hours of service for the employer. Up to $24,000 in wages may be taken into account in determining the WOTC for qualified veterans, giving the employer a potential $9,600 credit. Note that an employer cannot claim the credit for employees who are rehired.
The WOTC is part of the general business credit and can be used to offset business income. Unused credits can be carried back two years and forward 20 years. Tax-exempt organizations can apply the credit against payroll taxes for hiring qualified veterans.
While employers cannot use the same wages to claim other federal wage-based credits, such as the family and medical leave credit or the empowerment zone credit, employers are able to use additional wages paid to employees not covered by other credits to qualify for the WOTC.
Eligible Workers
The WOTC is given for hiring workers in ten targeted groups that have been identified as being unemployed long-term or have faced significant barriers to employment. The 10 groups include:
- Temporary Assistance for Needy Families (TANF) recipients
- Unemployed veterans, including disabled veterans
- Formerly incarcerated individuals and convicted felons
- Designated community residents living in Empowerment Zones or Rural Renewal Counties
- Vocational rehabilitation referrals
- Summer youth employees living in Empowerment Zones
- Supplemental Nutrition Assistance Program (SNAP) recipients
- Supplemental Security Income (SSI) recipients
- Long-term family assistance recipients
- Long-term unemployment recipients, defined as those being unemployed for 27 or more consecutive weeks who received unemployment compensation during that time.
State Certification Needed
Employers must get state-certified before they can take the WOTC. Their state agency must certify potential hires as a member of a targeted group. To get certification, employers must submit IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to their state workforce agency within 28 days after the eligible worker starts the job. The form is not submitted to the IRS.
How to Claim the Credit
The WOTC is taken on the employer’s federal income tax return and is figured on Form 5884, Work Opportunity Credit. The credit then is claimed on Form 3800, General Business Credit. The credit is time-limited and only is available for wages paid to targeted individuals who begin work on or before December 31, 2025.
With this beneficial offset, employers should consider seeking out available workers who would qualify for the credit and who have a demonstrated need for employment.