As an employer, taking advantage of the various tax credits available can help you reduce your overall tax liability and boost your bottom line. One of the top tax credits a wide range of employers may qualify for is the Work Opportunity Tax Credit (WOTC). The WOTC is a federal tax credit program that encourages employers to hire individuals from certain target groups who face barriers to employment. But who qualifies for the Work Opportunity Tax Credit? In this comprehensive guide, we’ll walk through the basics of the WOTC program.
What Is the Work Opportunity Tax Credit (WOTC)?
The Work Opportunity Tax Credit is a federal tax credit program created to encourage Employers to hire employees from target groups who’ve historically faced barriers to employment. In addition to hiring employees from target groups, this tax credit incentivizes employers to create a more diverse workplace and increase access to quality employment for all Americans. Depending on eligibility category, hours worked, and wages paid, an employer can secure a tax credit of up to $9,600 per hire. Whether you are a small or medium-sized business or an industry giant, this amount in credit savings is bound to make a difference and greatly impact a company’s financial situation. In today’s business environment, companies of all sizes are looking for ways to save money and improve the bottom line, and WOTC can provide immediate returns
The Work Opportunity Tax Credit Process
Employers must request and receive certification from their State Workforce Agency (SWA) that the new hire is a member of one of the WOTC target groups before they can claim the Work Opportunity Tax Credit on their federal tax return.
To apply for WOTC certification, employers must:
- Complete the IRS Form 8850, Prescreening Notice and Certifications Requests for the Work Opportunity Tax Credits, by having the new hire fill out page 1 prior to the date of the job offer and the employer complete page 2;
- Have new hires complete one of the following U.S. Department of Labor forms, as appropriate:
- IRS Form 9061, Individual Characteristics Form, or
- IRS Form 9062, Conditional Certification Form.
- Mail the completed and signed forms to the SWA within 28 days of the start date.
Supporting documentation can be sent later, however, it is important for the employer to collect necessary documentation from the individual at the time of hire.
Who Qualifies for the Work Opportunity Tax Credit?
Since it was created in 1996, the Work Opportunity Tax Credit has changed, and while some of the original WOTC target groups remain in place, some of them were modified while others no longer exist. The current WOTC target groups are:
Qualified Veteran
WOTC is available for qualifying veterans who meet the criteria for one or more of the following categories at the time of hire:
- A veteran who received food stamps (Supplemental Nutrition Assistance Program, or SNAP) for three consecutive months within the last 15 months;
- A veteran who is entitled to compensation for a service-connected disability and was discharged from the military within one year prior to the hiring date;
- A veteran who is entitled to compensation for a service-connected disability and was unemployed for at least six months during the year prior to the hiring date;
- A veteran who was unemployed for at least four weeks but less than six months during the year prior to the hiring date; and
- A veteran who was unemployed for at least six months within one year prior to the hiring date.
Qualified IV-A Recipient
A WOTC-eligible IV-A recipient is an individual who is a member of a family receiving assistance under a state plan approved under part A of title IV of the Social Security Act relating to Temporary Assistance for Needy Families (TANF). The assistance must be received for any 9-month period during the 18-month period ending on the hiring date.
Qualified Ex-Felon
Qualified ex-felons are individuals who were convicted of a felony and hired within a year after their date of conviction, work release, or release from prison or jail.
Designated Community Resident
A designated community resident is an individual between the ages of 18 and 39 and resides within one of the following:
- An empowerment zone;
- An enterprise community; or
- A renewal community.
Also, a designated community resident must continue to reside at these locations after employment.
Vocational Rehabilitation Referral
A vocational rehabilitation referral is an individual who has a physical or mental disability and has been referred to the employer while receiving or upon completion of rehabilitative services pursuant to:
- A state plan approved under the Rehabilitation Act of 1973; or
- An Employment Network Plan under the Ticket to Work program; or
- A program carried out under the Department of Veteran Affairs.
Summer Youth Employee
A summer youth employee is an individual aged 16 or 17 who has a principal place of abode within an empowerment zone, enterprise community, or renewal community and is employed between May 1 and September 15.
Qualified Supplemental Nutrition Assistance Program (SNAP) Recipient
A qualified Supplemental Nutrition Assistance Program (SNAP) benefits recipient is an individual who on the date of hire is at least 18 years old and under 40 and a member of a family that received SNAP benefits for:
- the previous 6 months; or
- at least 3 of the previous 5 months.
Supplemental Security Income (SSI) Recipient
Members of this WOTC target group include individuals who have received Supplemental Social Security (SSI) under Title XVI of the Social Security Act for any month ending within the 60-day period ending on the hiring date.
Long-Term Family Assistance Recipient
A long-term family recipient is an individual who, at the time of hire, is a member of a family that meets one of the following conditions:
- Received assistance under a IV-A program for a minimum of the prior 18 consecutive months; or
- Received assistance for 18 months beginning after 8/5/1997 and it has not been more than 2 years since the end of the earliest of such 18-month period; or
- Ceased to be eligible for such assistance because a Federal or State law limited the maximum time those payments could be made, and it has been not more than 2 years since the cessation.
Qualified Long-Term Unemployment Recipient
A member of this target group is an individual who has been unemployed for at least 27 consecutive weeks and received unemployment compensation under state or federal law at some point during this period.
Ineligible Populations
Some exclusions apply to WOTC eligibility. The following individuals or groups of individuals cannot qualify for the WOTC, even if they are members of WOTC target groups:
- Employer’s relatives and dependents;
- Majority owners of the company; and
- Former employees (re-hires)
The Benefit of Outsourcing Tax Credits Management
Claiming the WOTC credit can be a long and complicated process. Outsourcing tax credit administration comes with a wide range of benefits, including:
- Remaining compliant with state and federal tax guidelines
- Freeing up time in HR and payroll departments
- Meeting necessary deadlines to claim tax credits
- Identifying new tax credit opportunities to further lower tax liabilities
At Experian Employer Services, our WOTC administration can easily help you claim this credit.
- Maintaining accurate records
- Monitoring deadlines
- Consulting tax professionals
