Claim Your Employer WOTC Federal Tax Credit
What is the Workforce Opportunity Tax Credit?
The WOTC is a federal tax credit available to employers who hire members of certain targeted groups—specifically those who have consistently faced barriers to employment. The WOTC program reduces the employer’s wage deduction dollar-for-dollar.
WOTC Extended to 2025
Previously scheduled to sunset at the end of 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 extends the WOTC through the end of 2025. The goal of this program is to incentivize employers to hire diverse candidates and facilitate access to jobs for American workers from certain targeted groups.
WOTC Eligibility Requirements
- Hire these workers prior to 2026.
- Obtain certification affirming the individual’s status as a member of a targeted group.
- Submit the completed IRS Form 8850 to the appropriate State Workforce Agency within 28 days after the individual begins work.
With such a competitive hiring climate, the credit can help offset the cost of turnover and cover recruitment incentives, like hiring bonuses. Employers claim about $1 billion in tax credits each year under the WOTC program—but there’s a lot of cash left on the table by owners unaware of the credit.
How the WOTC is Calculated
The Work Opportunity Tax Credit is calculated as 40% of first-year eligible wages, up to a maximum of $6,000 per employee. If the employee completed at least 120 hours but less than 400 hours of service for the employer, the WOTC is up to 25% of first-year eligible wages. A different maximum credit calculation may apply in the case of qualified veterans and qualified summer youth employees.
WOTC Frequently Asked Questions
Which wages do not qualify for the WOTC?
Some wages do not qualify for the Work Opportunity Tax Credit.
For example, wages paid for federally funded on-the-job training are not eligible for the WOTC. Wages paid to an individual who performed the same or substantially similar services as employees participating in or affected by a strike or lockout at the employer’s plant likewise do not qualify for the credit. WOTC wages are reduced by any supplementation payments made to the employer for an employee under Social Security Act §482(e). Additional limitations may apply when calculating the credit.
How do employers claim the Work Opportunity Tax Credit?
For-profit employers may claim the Work Opportunity Tax Credit on Form 5884. The credit is elective—employers are not required to claim the WOTC even if they’re eligible to do so.
How do tax-exempt employers claim the WOTC?
A tax-exempt employer is generally not eligible for a WOTC. However, a tax-exempt employer can claim a Work Opportunity Tax Credit using Form 5884-C when hiring qualified veterans. WOTC is allowed against the Old Age, Survivors, and Disability Insurance program (OASDI)—often referred to as the Social Security tax owed by the tax-exempt employer. The credit is calculated in the same way it would be if the employer was not tax-exempt, with a few modifications:
- 26% (instead of 40%) for qualifying first-year wages
- 16% (instead of 25%) for a qualified veteran who has completed at least 120 hours but less than 400 hours of service for the employer.
The tax-exempt employer can only consider wages paid to a qualified veteran for services related to the employer’s exempt purposes.
Who qualifies for WOTC?
To qualify, a new hire must fit into one of the target groups identified by the U.S. Department of Labor. These Include:
- Qualified veterans
- Qualified ex-felons
- People with physical or mental disabilities
- Summer youth employees
- Recipients of SNAP benefits
- SSI recipients
- Qualified long-term unemployment recipients
Visit the IRS for a complete list of targeted groups.
A new hire must work a minimum of 120 hours during the first year of employment for the employer to receive a credit. Owners can receive a tax credit for each eligible hire; there’s no limit.
Can I receive a credit for rehiring an individual I laid off during the pandemic?
How much of a tax credit can I receive?
You can earn a maximum credit of $2,400 for each employee on long-term unemployment at the time of hire. Employers earn a credit equal to 25% of the employee’s wages if the staffer works at least 120 hours in the first year and 40% if the individual works at least 400 hours—up to the $2,400 cap. So, there’s a perk for retaining employees. Some targeted categories offer a larger credit, with the highest being $9,600 for hiring a disabled veteran.
How to Apply for for Workforce Opportunity Tax Credits
1. Pre-Screen Applicants
Individuals can fill out IRS Form 8850 directly on paper/PDF, or they can complete and sign a screening questionnaire electronically, often through an applicant tracking system or an onboarding platform.
Employers can’t require individuals to answer the qualifying questions, but voluntary participation is high when the process is incorporated into hiring procedures, says Commons.
The screening questions are compliant with Equal Employment Opportunity laws, so you can use the information to tip the scales in your hiring decisions. The program’s intent is to give employers “an incentive to take a chance on somebody who has struggled,” says Commons.
2. Submit Certification Information Immediately
- Submit Form 8850 and other required information to your state workforce agency within 28 calendar days of the new hire’s start date.
- Include ETA Form 9061 or Form 9062. This information can also be gathered along with the Form 8850 details through a one-stop process using an electronic questionnaire.
- When hiring unemployed applicants, include ETA Form 9175, Long-Term Unemployment Recipient Self-Attestation Form. Many states will notify you if an employee is certified within five months, but some take two years or longer, Commons notes.
3. Claim Your Tax Credit
Track the hours and wages of employees that your state certifies as WOTC eligible. You’ll need this information to claim your tax credit using IRS Form 5884 and IRS Form 3800. Consider outsourcing your WOTC administration. Some HR professionals, like MyHRConcierge, offer a service based on contingency fees.
Use MyHRConcierge Services to Maximize Your Tax Credits