Work Opportunity Tax Credit (WOTC) FAQs- Employers Prospective
What is Work Opportunity Tax Credit?
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who invest in hiring Americans from certain target groups who have previously faced barriers to employment.
The goal of this is to act as an incentive for employers to exemplify workplace diversity in return for a maximum tax credit. It is supposed to promote the hiring of American workers of a certain target group while providing a federal tax incentive to employers who hire them. Employers have until December 31, 2025 to file. The amount of the tax credit under the WOTC program depends on the target group the employee belongs to as well as qualified wages paid and hours worked. Taxable employers can carry the current year period’s unused WOTC back one year or forward 20 years.
Where did the WOTC Tax Credit come from?
The WOTC was created back in 1996 as part of Section 1201 of the Small Business Job Protection Act of 1996 and has since been updated on multiple occasions. Even back then, employers at for-profit organizations could claim a tax credit against federal tax liabilities for hiring members of certain groups. Tax-exempt employers can claim WOTC against their payroll taxes.
In 2015, The Protecting Americans from Tax Hikes Act (PATH Act) allowed qualified employers to claim WOTC for targeted group employee categories that were apparent before the enactment of the PATH Act as long as the individual began working for them after December 31, 2014 and before January 1, 2020. In the fiscal year of 2021, over 2 million certifications were filed by state workforce agencies. These SWAs received over $18 million in support of the WOTC program.
Workforce programs such as this one were created as a voluntary act for businesses. Therefore, businesses do not need to send a job offer to an individual in one of the target groups. However, businesses are encouraged to invest in American job seekers who have faced barriers to unemployment in order to establish diversity in the workplace.
How do you qualify for the WOTC Tax Credit?
When looking into employer eligibility for the WOTC program, there are a few qualifications businesses must meet. Employers must verify that the new hire was part of the target group in order to claim work opportunity tax credit.
What is the target group for an eligible employee?
- Ex-felons – those who have been previously convicted of a felony who have been released within the last 12 months
- Recipients of state help under title IV of the Social Security Act (SSA)
- Qualified veterans – veterans who have served over 180 days or were discharged sooner because of a service-connected disability
- Summer youth employees between the ages of 16-18 who are employed from no longer than May 1st to September 15th
- Applicants who qualify for supplemental security income (SSI) benefit
- Individuals who are long-term family assistance recipients or require temporary help for needy families (TANF)
- A designated community resident living in empowerment zones or rural renewal counties – empowerment zones are economically distressed communities, eligible to receive tax incentives and grants from the federal government
- Individuals who are part of a supplemental nutrition assistance program under the Food and Nutrition Act of 2008
- A qualified long-term unemployment recipient
- Individuals referred after completing a rehabilitation program
Individuals must have a required certification from a state workforce agency, must be within one of the ten targeted groups, and be in their first year of employment in order to be eligible. Several factors that can prevent an employer from qualifying are if they hire a family member, former employee, or someone who will have a large share in the company. In order to be eligible, employees must work a minimum of 120-400 hours. Within a qualified first-year period for employees who worked between 120-400 hours, credit is 25% of these first-year wages. For employees who worked over 400 hours, 40% of first-year wages can be credited.
If you are interested in creating a diverse workplace by hiring individuals within the specified target groups, there are many resources to help you find qualified candidates such as American Job Centers. Some examples of these can be the Veterans Administration, social services offices, and various vocational rehabilitation centers. Some candidates even have certain certifications that tell potential employees the amount of credit they could earn if they hire this individual.
What should you pay attention to?
After employees are deemed as part of the target group, employers must file for the tax within 28 days of the employee’s start date. Employers can find out if employees are a member of the target group by asking them to fill out a questionnaire upon hire.
To file for WOTC, the (Internal Revenue Service) IRS Form 8850 must be completed, along with several forms from the Department of Labor. IRS Form 8850 acts as a pre-screening notice to make a certification request to the state workforce agency (SWA). DOL requires employers to fill out an Individual Characteristics Form (ICF) and ETA Form 9061 or 9062. The purpose of the forms are to ensure the individuals qualify as one of the targeted groups. All forms can be submitted via email, online, or direct mail.
Both new businesses who do not have much tax credit and larger companies with a large credit portfolio can take advantage of the WOTC. Plus, businesses can apply for more than one credit for the same employee. However, credit is limited to the business’ income tax liability. Credit will not affect the employer’s Social Security tax liability on their tax return. Taxable employers can claim WOTC as a general business credit against their income taxes.
Benefits of outsourcing tax credits and business incentives administration
Both newly eligible business that haven’t yet taken advantage of tax credits and those that already have a large tax credit portfolio may benefit from outsourcing tax credits. It can help them:
Identify and evaluate new opportunities for which they may be eligible
Maintain accurate records so they can make informed decisions backed by data
Stay compliant with changing tax credit laws and avoid penalties
Report tax credit activities and meet deadlines
Why is working with us the best way to file?
The work opportunity tax credit can confuse those who have not previously filed. Working with us will save you time and effort, and will ensure you file correctly to find out the amount of your business’ income tax liability. We will make sure that all the requirements for the IRS, DOL, and U.S. Employment and Training Administration are met in order to successfully create your WOTC account. Contact us today.
How much is the Work Opportunity Tax Credit?
The amount of the tax credit available under the WOTC program varies based on the employee’s target group, total hours worked and total qualified wages paid. As of 2020, most target groups have a maximum credit of $2,400 per eligible new hire, but some may be higher. Hiring certain qualified veterans, for instance, may result in a credit of $9,600 per eligible new hire.
Does the Work Opportunity Tax Credit benefit employees?
Although the tax credit only applies to employers, the WOTC program may benefit employees by making career opportunities available to those who otherwise might have had a hard time landing a job. Such individuals include ex-felons, veterans and food stamp recipients.
What Work Opportunity Tax Credit integrations does Legacy WOTC offer?
Legacy WOTC and our partnership with ADP automated WOTC solution seamlessly integrates with most recruiting and hiring software and applicant tracking systems (ATS).
Is participation in the Work Opportunity Tax Credit program mandatory?
The Work Opportunity Tax Credit is a voluntary program. As such, employers are not obligated to recruit WOTC-eligible applicants and job applicants don’t have to complete the WOTC eligibility questionnaire. Employers can still hire these individuals if they so choose, but will not be able to claim the tax credit.
Does the Work Opportunity Tax Credit benefit employees?
Although the tax credit only applies to employers, the WOTC program may benefit employees by making career opportunities available to those who otherwise might have had a hard time landing a job.
Are there any limits to how much I can get back in tax credit?
There is no limit in the amount of the Work Opportunity Tax Credit you can generate. However, a for-profit business can only offset their business income tax liability. If the credit exceeds the income tax liability, the excess can be carried back one year and then forward for up to 20 years or until used up, whichever is sooner.
Can I claim other wage-based credit with the WOTC?
Generally, the wages used to calculate the WOTC cannot be used to other wage-based credits. An employer may be able to claim more than one wage-based credit, for the same employee, as long as the same wages are not used to calculate more than one credit. In other words, each credit must be beneficially allocated the qualifying wages to meet the qualification requirements of that credits such as the Empowerment Zone Employment Credit, Employee Retention Credit and Empoyee Credit for Paid Family and Medical Leave.
What forms are required for WOTC?
On or before the day that an offer of employment is made, the employer and the job applicant must complete Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit.) The employer has 28 calendar days from the new employee's start date to submit Form 8850 to the designated local agency located in the state in which the business is located (where the employee works). Additionally, the employer must complete and submit ETA Form 9601 (Individual Characteristics Form) within 28 days of the employee's start date to the designated local agency. The employer will ten file a Form 5884 on their tax return to calculate and claim the Work Opportunity Tax Credit with their tax return.
How are the Tax Credits Calculated?
CMS Responds: The Work Opportunity Tax Credit is 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. Employers will earn 25% if the employee works at least 120 hours and 40% if the employee works at least 400 hours. Typically 10-15% of new hires may be eligible, and the average tax credit is $2,400 based on 400 hours.
What is considered start date. date actually started work or date hired?
The “start date” from a WOTC perspective is the date the employee actually started working for paid compensation. This does not include any days spent doing any
unpaid work or training.
Can a non-profit organizations participation WOTC?
Yes, Qualified tax-exempt organizations described in IRC Section 501(c) and exempt from taxation under IRC Section 501(a), may claim the credit for QUALIFIED VETERANS ONLY who begin work on or after December 31, 2014, and before January 1, 2020.
I have a new hire who would have qualified, and it is after 28 days, can I release them and re-hire to meet the 28 day rule?
The Work Opportunity Tax Credit program is an incentive for employers to hire new employees from the target groups. Unfortunately, if you terminate the employee, and
then later rehire them, they would no longer be eligible as a rehire. This is why it’s critical for employers to be aware of the 28-day rule, which requires employers, or a service provider, to submit qualified applicants to the state workforce agency within 28-days of the employee’s start date.
Can I still get a partial credit if the employee only worked for a few weeks?
It all depends on how many hours the employee worked for you. If a qualified employee worked full time for you for three weeks, they would reach the minimum
number of hours 120 so you would be eligible for a partial WOTC credit of 25% of up to $6,000 in wages or $1,500. If the employee works less than 120 hours, you would not be able to use the credit.
Can the WOTC be applicable for part-time employees? Those working less than 30 hours per week?
Part-time employees are definitely eligible. The only difference is that it may take them slightly longer than a full-time employee to reach either the minimum
amount of hours required to qualify (120) or the maximum (400). A full-time employee working 40 hours per week would reach the 120-hour target after 3 weeks of full-time employment, whereas someone working 30 hours per week would take 4 weeks.
What is the benefit to the employee?
The actual WOTC credit is only given to the employer as an incentive for hiring someone who may have faced barriers to becoming employed such as individuals on SNAP (food stamps), TANF, ex-felons, the long-term unemployed, and Veterans. There are ten target groups.
Does the new hire have to fill out the forms?
The Work Opportunity Tax Credit program is an incentive for employers to hire new employees from targeted groups of employees. New hires may be asked to complete the WOTC questionnaire as part of their onboarding paperwork, or even as part of the employment application. It is voluntary from the new hire’s perspective, an employer cannot require the employee to complete the forms.
What is a Conditional Certification from the State Workforce Agency?
The first question on the IRS Form 8850 is “Check here if you received a conditional certification from the state workforce agency (SWA) or a participating local agency for the work opportunity credit.”
Some states refer to employment agencies as State Workforce Agencies (SWA), while others refer to them as State Employment Agencies. When a SWA determines that a job-ready applicant is, TENTATIVELY ELIGIBLE as a member of a WOTC target group, it uses the DOL Form 9062, to show that eligibility pre-determination was made for the individual. The Conditional Certification alerts prospective employers to the availability of the tax credit if this individual is hired.
Can WOTC Apply to My Seasonal Hires?
Definitely. Make sure you include the WOTC survey with your standard new hire paperwork (paper or online). Seasonal hires still have to work a minimum amount
of 120 hours to obtain the Work Opportunity Tax Credit.
Why Should I Use a Service Like Yours When I Can Do It Myself?
While WOTC is something you can do yourself, there are several reasons employers large and small use our WOTC administration services;
- We aim to reduce the administrative burden on your staff,
- Maximizes your tax credits,
- Help maintain compliance, and
- Make it easy to implement.
We can get you up and running today!
How Legacy WOTC and our partnership with ADP can help employers navigate the Work Opportunity Tax Credit program
ADP’s web-based WOTC screening system improves screening compliance rates and simplifies data collection. It uses plain language and automatically skips sections of the WOTC questionnaire that may be irrelevant, helping applicants complete the form quickly and correctly. We also offer benchmarking and analytics tools that can help employers forecast their tax credits. Legacy will prepare the annual credit application form.
Legacy WOTC and our partnership with ADP saves time and reduces stress for Work Opportunity Tax Credit clients
Switching from a manual Work Opportunity Tax Credit screening process to ADP’s automated solution can help minimize the workload of hiring managers. It works on most mobile devices, so there’s less paperwork and it has applicant-friendly features that make it more likely for applicants to complete the WOTC questionnaire.
Note: Even if you decide not to take advantage of the ADP screen, Legacy WOTC can still help your company obtain WOTC.
What differentiates Legacy WOTC and ADP from other Work Opportunity Tax Credit providers?
ADP screens over 34 million applicants per year for the WOTC program*. With that level of experience across different industries, we’re uniquely positioned to help employers identify and apply for tax credits while maintaining compliance.
*Source: ADP Internal Data, 2019.