How Does the Work Opportunity Tax Credit Work?

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The Work Opportunity Tax Credit (WOTC) program is a federal tax credit available to employers if they hire individuals from specific targeted groups. The employee groups are those that have had significant barriers to employment. This tax credit program has been extended until December 31, 2025.

Key Takeaways

  • The Work Opportunity Tax Credit program gives employers an incentive to hire individuals in targeted groups who have significant barriers to employment.
  • The credit is based on the category of workers, the wages paid to them in their first year of work, and the hours they work.
  • An employer must first get a determination of eligibility from their state workforce agency before they can apply for the tax credit.
  • To receive the tax credit, the employer must submit an application form to the IRS along with the business's or owner's tax return.

What Types of Workers Qualify for WOTC?

Let's say your business is hiring. The first thing you need to do is determine if a worker you are hiring fits into one of the specific categories that qualify you for the Work Opportunity Tax Credit. The categories of workers you can hire to qualify for this tax credit are:

  • Qualified veterans
  • Qualified IV-A recipients of state programs for needy families with children
  • TANF Recipients (long-term temporary assistance for needy families)
  • SNAP (food stamp) recipients
  • Designated community residents (living in empowerment zones or rural renewal counties).
  • Vocational rehabilitation referral
  • Ex-felons
  • Supplemental security income (SSI) recipients
  • Summer youth employee (living in empowerment zones)
  • Qualified long-term unemployment recipients

In addition to the general qualifications, there are specific qualifications within each category. This Work Opportunity Tax Credit Eligibility Chart provided by the Department of Labor (DOL) includes details.

What Workers Are Not Eligible?

Even if they might otherwise make your business eligible for the tax credit, you can't get the tax credit for hiring the following people:

  • Your relatives or dependents, including children, stepchildren, spouse, parents, siblings, step-siblings, nephews, nieces, uncles, aunts, cousins, or in-laws
  • Majority owners of your business

How To Qualify a Worker

During the hiring process, before or on the day the employee begins work, the employer and the applicant must complete two forms. If you don't complete the forms during the hiring process, you won't be able to get the tax credit.

First, you and the applicant must complete IRS Form 8850, the IRS pre-screening form. When the job offer is made, the applicant completes the first page showing their eligibility. When the applicant is hired, you as the employer complete the second page giving your information and information on the person hired.

You and the applicant must also complete DOL Form 9061. The applicant completes the form and the employer verifies the identification documents the person submits. Some applicants may have already completed Conditional Certification DOL Form 9062 instead.

As soon as the person is hired, you must submit Form 8850 and Form 9061 to the state workforce or employment agency for a determination on the eligibility of this worker for WOTC credit. The forms must be submitted no later than the 28th calendar day after the person begins work.

Some states allow employers to submit a WOTC application online, Check with your state workforce or employment agency for details on how to submit applications.

When the state agency certifies the worker's eligibility status, it sends a determination letter to the employer.

You can estimate your potential tax credit using this WOTC Tax Savings Calculator from the DOL. The amount of the potential tax credit is based on an estimate of $2,400 per employee.

Wages Counted for the Tax Credit

After the employee is hired, the next step is determining the amount of wages for the tax credit for that employee. The wages must be paid in the first year of employment, and the employee must have worked 120 hours in their first year to qualify. As a result, you may have to wait until 120 hours has been accumulated by an employee before filing and qualifying for the credit.

You can include all payments made to the employee in that year, with these details:

  • The wages must be wages on which your business has paid federal unemployment tax.
  • They must actually have been paid by your business directly. Wages subsidized by another party or indirectly paid through your business don't count toward the WOTC.

You can claim a tax credit of 25% of the wages if the employee works at least 120 hours during the first year and 40% if the employee works at least 400 hours. There are maximum hours for each type of employee category.

Employee wages used to calculate WOTC eligibility cannot also be used to calculate other employee-based tax credits, like the Employee Retention Credit, Employer-Paid Family and Medical Leave Credits, other disaster retention credits, or forgivable Paycheck Protection Program loan proceeds.

How To Apply for the Work Opportunity Tax Credit

After the worker is hired, and you have received the letter from your state's workforce agency showing that the worker qualifies, you can claim the tax credit by completing and submitting one of two forms, depending on your business type:

  • IRS Form 5884 for partnerships, S corporations, cooperatives, estates, and trusts
  • IRS Form 3800, the General Business Credit, for all other taxpayers and business owners

For this form, you will add up all the wages of qualified workers, depending on their hours worked and their category, and multiply these amounts by the number of hours worked during the year and the appropriate percentages (as described above). The form is added to the tax return and used for calculating the business or individual tax liability.

How the WOTC Affects Business Taxes

A business may apply the credit to its income tax liability for the year, along with other tax credits, in a specific order. Which tax form is used to claim the tax credit depends on the business type. Pass-through businesses in which the income and loss of the business are passed through to the owners include WOTC tax credit applications on their Form 1040 or 1040/SR (for seniors).

The amount of the WOTC credit is limited to the amount of the business income tax liability or Social Security tax owed.

Frequently Asked Questions (FAQs)

What is a WOTC screening?

WOTC screening is the process employers use to determine if a potential hire qualifies to be included in the calculations for the employer's tax credit. The employee must meet requirements based on the hours they work and whether they are members of a qualifying category of worker.

The employer and applicant complete IRS Form 8850, a pre-screening form for the state workforce agency, and Dept. of Labor Form 9061 for federal tax credit eligibility purposes. When the state agency sends back its determination that the employee is qualified, the employer may then apply to the IRS for the tax credits for all employees.

What does the Work Opportunity Tax Credit do for the employee?

While employees hired under the WOTC program don't get extra money for being in a special category, the program does increase their chances of being hired. The amount of the tax credit may range from $1,500 to $9,600 for each qualified individual, giving the employer a reason to hire someone who might not be as skilled or experienced as other applicants.