Understanding and Qualifying for the Work Opportunity Tax Credit

A robust economy relies on a business environment that promotes growth. One way to achieve this is to incentivize companies to expand their workforce. The Work Opportunity Tax Credit (WOTC) represents a government effort to boost hiring, while creating opportunities for traditionally marginalized workers.

Let’s take a closer look at the WOTC, how it works, and how to know if your business qualifies.

What is the Work Opportunity Tax Credit and Who Administers It?

The WOTC represents a national-scale effort to both boost hiring and to open employment opportunities for traditionally disadvantaged workers—such as veterans, ex-felons, and the long-term unemployed. Administered by the U.S. Department of Labor and the Internal Revenue Service (IRS), the WOTC is based on qualified wages paid to these employees over their first year of employment. To qualify, you’ll need to complete Form 5884 and submit it along with Form 3800 of your business taxes.

How Does the WOTC Work?

The specific credit amounts offered by the WOTC vary and are dependent upon the target group to which the employee belongs, the employee’s annual salary, and the number of hours worked during their first year of employment. For example, an ex-felon may qualify for an $8,000 credit based on allowable wages, while a person classified as a long-term family assistance aide may qualify for a $10,000 credit.

For a full-time employee, the claimable credit will vary between 25% or 40% of the worker’s qualified wages. Typically, employers will be eligible for 25% of the employees wages if the employee works at least 120 hours. For employees working at least 400 or more hours in the first year, the credit can equal 40% of the employees wages in the first year. Employees who worked under 120 hours during the previous year do not qualify for the credit.

What Types of Workers Qualify for the WOTC?

The first step in determining whether you may benefit from the WOTC is to determine whether your employees are within any of the target groups. These include:

  • Temporary Assistance for Needy Families (TANF) IV-A recipients
  • Qualified veterans (must have served a minimum of 180 days and meet other criteria)
  • Ex-felons (anyone released from prison within the previous year)
  • Designated community residents (those living in empowerment or economic opportunity zones)
  • Vocational rehabilitation referrals (those with a mental or physical disability)
  • Summer youth employees
  • SNAP recipients
  • Supplemental social security income recipients
  • Long-term family assistance recipients
  • Qualified long-term unemployment recipients

In addition, you’ll need to go through a pre-screening and certification process. You’ll need approval from your state workforce association proving that you’ve hired one or more workers that qualify for the credit.

  • Be sure the job applicant completes Form 8850 on the day of or before a job offer is made.
  • Complete the remainder of the form before or on the date that the job offer is made.
  • Complete the conditional certification Form 9061 (or Form 9062 if they’ve already applied).

Which Workers Are Not Eligible for the WOTC?

The program covers employees only, not spouses, families, or dependents.Also excluded are employees who are majority stakeholders in the company as well as former employees no longer working with the company.

When Does the Program Expire?

The program is set to continue through December 31, 2025 in hopes that a long-term incentive program will help expand hiring, reintegrate marginalized workers into the workforce, and help maintain a growing economy.

Contact Us

Still have questions about the WOTC? At Moskowitz LLP, our experienced tax preparers and attorneys can help you determine if your business qualifies for the WOTC. And don’t be discouraged by the paperwork. We can help you obtain, complete, and file the needed documentation to get you the credit you deserve. Contact us today!