What Is the Work Opportunity Tax Credit (WOTC)?
The work opportunity tax credit (WOTC) is a federal tax credit that's available to employers who hire individuals from certain targeted groups. That includes people who have faced significant barriers to employment. This tax credit is meant to encourage diversity in the workplace while also making jobs more accessible to specific segments of the workforce.
- The work opportunity tax credit is available for eligible employers who hire employees from certain targeted groups.
- Employers must meet pre-screening and certification requirements to claim the tax credit.
- Pre-screening and certification documents must be submitted to the appropriate state workforce agency within a specific window after employee hiring.
- The WOTC is set to expire on December 31, 2020.
Understanding the Work Opportunity Tax Credit (WOTC)
The work opportunity tax credit is administered jointly by the Department of Labor (DOL) and the U.S. Treasury through the Internal Revenue Service (IRS). The DOL provides grant funding and policy guidance to state agencies that oversee the certification process while the IRS is responsible for managing tax-related requirements for claiming the credit.
The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) allows eligible employers to claim the WOTC retroactively for eligible employees from targeted groups who were hired between December 31, 2014 and December 31, 2020. Whether a business can claim the credit is based on the category of workers it hires, the wages those workers are paid in their first year of employment, and the number of hours they work.
Types of Workers Who Are Eligible for the WOTC
Employers can only take advantage of the work opportunity tax credit if they hire from certain targeted groups. According to IRS guidelines, targeted groups include:
- Individuals who receive temporary assistance for needy families (TANF) benefits under Part A, Title IV of the Social Security Act
- Qualified veterans, including those receiving supplemental nutrition assistance program (SNAP) benefits, those who are unemployed, and those who are unemployed and entitled to compensation from a service-connected disability
- Qualified ex-felons
- Designated community residents who are at least 18 and under 40 and live in an empowerment zone, enterprise community, or renewal community
- Individuals with physical or mental disabilities who have been referred for work after completing rehabilitative services
- Summer youth employees
- Supplemental nutrition assistance program (SNAP) recipients
- Supplemental Security Income (SSI) recipients
- Long-term family assistance recipients
- Qualified long-term unemployment recipients
Required Certification Forms for the WOTC
Employers are required to certify that a potential employee is a member of a targeted group in order to claim the work opportunity tax credit. That involves filling out different forms, with information from both the employee and the employer.
IRS Form 8850
One form that that to be filled out is Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit.
Form 8850, Page 1 must be filled out by the employee, who must provide their:
- Social Security number
- Certification status (i.e., which targeted group they belong to)
Form 8850, Page 2 requires the employer to provide:
- Their contact information
- The date the employee was offered a job
- The date the employee was hired
- The date the employee started work.
Both the employee and the employer must sign Form 8850 before the employer files the form with the employer's state workforce agency. This must be done within 28 days after the employee they're claiming the credit for begins working.
DOL Form 9061
A second form has to be completed, this time for the Department of Labor. DOL Form 9061 is completed by the employee, and the employer has to verify that the information is correct using supporting documents. Such documents may include, for example, a copy of the employee's birth certificate, military discharge papers, or records of receiving SNAP or SSI benefits, depending on which targeted group they belong to.
If an employee has already been conditionally certified, meaning that they've been tentatively identified as belonging to a target group, the employer can complete DOL Form 9062 instead. Conditional certification decisions are made by the employer's state workforce agency and Form 9062 serves as an official record of pre-certification. Form 9061 or 9062 must be submitted by the employer when they send in Form 8850.
Both IRS Form 8850 and DOL Form 9061 or DOL Form 9062 must be filed with the employer's state workforce agency and not the IRS to be eligible for the credit.
Advantages and Disadvantages of the WOTC
Tax credits can help businesses reduce their tax liability which can be helpful to the bottom line. That's true for the work opportunity tax credit or any other type of business tax credit.
Another advantage of the credit has to do with increasing diversity in hiring. From a worker perspective, this tax credit could make finding work possible for certain groups that have otherwise been overlooked in the hiring process.
On the other side, the biggest challenge for employers may simply be meeting the certification and filing requirements. While the paperwork involved isn't complicated, employers have to ensure that they're filing forms correctly and on time to pre-screen and certify workers initially. They also have to keep accurate records of their employees' hours and wages earned in the first year of work to claim the credit.
The IRS allows the employer to apply the credit against business income tax liability for the year, with normal carry-forward and carry-back rules applying.
Claiming the Work Opportunity Tax Credit
Once an employee is certified, employers can claim the work opportunity tax credit on their income tax returns. This requires filing:
- IRS Form 5884, Work Opportunity Credit
- IRS Form 3800, General Business Credit
- IRS Form 1040, 1040-SR, 1041, 1120, etc.
To calculate the credit, employers must determine the number of hours worked by the employee and their wages for the first year of employment. The amount of credit an employer can claim is limited to the amount of the business income tax or Social Security tax owed.