The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers hiring and retaining individuals who experience significant barriers to employment. As such, WOTC can help employers who are facing labor shortages as well as certain groups of people who need assistance in the process of finding jobs.
Employers can claim about $9,600 per employee in tax credits per year under the WOTC program. The exact tax benefit amount that a business can receive depends on several factors, including:
- The target group of the individual who was hired,
- The employee’s salary in the first year, and
- The number of hours the employee worked in the first year.
There is no limit on the number of workers an employer can hire to qualify for the credit, but there is a maximum tax credit that can be earned for different WOTC target groups.
WOTC Target Groups
WOTC was created in 1996, mainly in order to move people from welfare to work, but the program has changed over the years. Some of the original WOTC target groups still remain in place, some of them were modified to work with other legislation, and some expired and no longer exist.
The government defines target groups as categories of people who face life circumstances that make it challenging for them to find gainful employment. Here are the current WOTC target groups:
Temporary Assistance to Needy Families (TANF) Recipient
A WOTC-eligible TANF recipient is an individual who is a member of a family receiving assistance under an IV-A program for any 9 of the 18 months prior to the worker’s hire date.
A qualified veteran is a worker who served on active duty in the U. S. armed forces for at least 180 days, has been discharged for at least 60 days, and meets at least one of the additional criteria listed below:
- A veteran who is a member of a family receiving Supplemental Nutrition Assistance Program (SNAP) assistance for at least 3 of the past 12 months,
- A veteran with a service-connected disability for which he or she is entitled to compensation and is within one year of discharge,
- A veteran with a service-connected disability for which he or she is entitled to compensation and has been unemployed for at least six months of the prior year,
- A veteran with an aggregate period of unemployment of at least four weeks but less than six months during the prior one year, or
- A veteran with an aggregate period of unemployment of at least six months during the prior year.
A qualified ex-felon is an individual who has been convicted of a felony under state or federal law and has a hiring date that is within one year of either the individual’s conviction or release from prison.
Designated Community Resident
A designated community resident is an individual between the ages of 18 and 39 who has a principal place of abode within an empowerment zone, enterprise community, renewal community, or rural renewal county.
Vocational Rehabilitation Referral
A member of this target group is a person with a physical or mental disability who is receiving or has received services under a state vocational rehabilitation program, the Department of Veterans Affairs Vocational Rehabilitation and Employment Program, or an employment network through the Social Security Ticket to Work program.Use this comprehensive guide to find out how to claim and calculate WOTC credits, how to apply and what steps to take to maximize the value of this federal incentive.
Summer Youth Employee
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 SNAP Recipient
A member of this target group is an individual between age 18 and 40 on the hiring date, either being a member of a family receiving assistance under SNAP for the 6-month period ending on the hiring date or receiving such assistance for at least 3 months of the 5-month period ending on the hiring date, in the case of a member of a family who ceases to be eligible for such assistance.
Supplemental Security Income (SSI) Recipient
This is an individual who has received 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 TANF Recipient
A long-term TANF recipient is a member of a family that has been receiving TANF benefits for the past 18 months or has exhausted TANF benefits in the past two years. Unlike other populations, an employer may claim the WOTC on behalf of a long-term family assistance recipient for two years. The maximum wage eligible for the WOTC for long-term family assistance recipients is $10,000 per year. During the second year of employment, the WOTC is equal to 50% of the eligible worker’s wages.
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.
Employers Eligible for WOTC
WOTC is a nonrefundable credit. Therefore, an employer must have a tax liability to claim it. WOTC can be claimed in a tax year subsequent to the year of hire. It is possible that an employer that hires a member of WOTC target groups but does not have a tax liability in the year in which the eligible worker was hired, would be able to have the WOTC applied to a subsequent tax year in which the employer has a tax liability.
Tax-exempt organizations that employ WOTC-eligible veterans may be eligible to claim a credit against the organization’s payroll tax liability. This provision is limited to organizations that employ qualified veterans and does not apply to tax-exempt organizations that employ members of other WOTC target groups.
Future of WOTC
The Protecting Americans from Tax Hikes Act of 2015 extended WOTC for all eligible WOTC target groups through December 31, 2019. Even though it is hard to say what will happen upon its expiration, the fact remains that WOTC plays a critical role in promoting the goal of tax reform, gives an opportunity for employment to high-risk workers, and reduces welfare costs. As such, it is consistent with the current administration’s anti-poverty and pro-work agenda.
Since it is a flexible policy tool, WOTC is open to modifications in response to changing needs within the country’s employment landscape. Therefore, adding other WOTC target groups in order to achieve higher employment rates is more effective compared to starting entirely new government programs. Furthermore, the transition to electronic systems reduces lengthy and complex WOTC administration and error-prone procedures. Such an approach solves the most common WOTC challenges and significantly improves the overall application process for companies.