WOTC – Hiring credits
Work Opportunity
Tax Credit
Comprehensive Guide

Author

Jeff Aleixo

1. Overview of WOTC

First, let’s cover the basics of the Work Opportunity Tax Credit: what is it, is it mandatory, what are the prerequisites, and how to calculate credits.

What is WOTC?

WOTC is a federal program that rewards private sector employers for hiring employees from specific target groups who have consistently faced significant barrier to employment. The mechanism behind the program is to give tax credits to employers who hire individuals targeted by WOTC, effectively subsidizing the cost of hiring and employing them.

Is WOTC Mandatory?

WOTC is a voluntary program whose central idea is that getting a job helps break the cycle affecting targeted individuals, who often find that a lack of job experience prevents them from getting hired. The goal of WOTC is to get members of target groups into jobs, which is different than the goal of creating new jobs associated with other employment subsidies. The jobs do not have to be permanent to provide the desired effect of offering work experience.

Basic Prerequisites

There is no limit to the number of new hires who can qualify for the credit per employer. To be eligible, employees must be new hires and may not be relatives or dependents of the owners, nor can the employees themselves be owners of the business.

How to Calculate WOTC Credits?

Tax credits are calculated based on the target group to which the employee belongs and the number of hours the employee works during the first year of wages. To qualify for these tax credits, a new hire must be certified by the state workforce agency as a member of at least one of the target groups.

Tax-Exempt Organizations

WOTC is available to certain tax-exempt organizations. A qualified tax-exempt organization is “an employer that is an organization described in section 501(c) and exempt from taxation under section 501(a).” Such organizations may claim the credit for qualified veterans who begin work on or after December 31, 2014, and before January 1, 2020.

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2. How Does WOTC Work

The tax credit employers can claim depends upon the target group of the individual hired, the wages paid to that individual in the first year of employment, and the number of hours that individual worked. There is also a maximum tax credit that can be earned.

Tax Credit for TANF Target Group

For the long-term Temporary Assistance for Needy Families (TANF) target group only, the credit is available to employers who hire members of this group for up to a two-year period.

  • In the first year, the employer may claim a tax credit equal to 40% of the first-year wages, up to the maximum tax credit, if the individual works at least 400 hours.
  • In the second year, the employer may claim a tax credit equal to 50% of the second-year wages, up to the maximum tax credit, if the individual works at least 400 hours.

Tax Credit for Other Target Groups

For all other target groups, the credit is available to employers who hire members of these groups, based on the individual’s hours worked and wages earned in the first year.

  • If the individual works at least 120 hours, the employer may claim a tax credit equal to 25% of the individual’s first year wages, up to the maximum tax credit.
  • If the individual works at least 400 hours, the employer may claim a tax credit equal to 40% of the individual’s first year wages, up to the maximum tax credit.
wotc-target-groups

3. Target Groups that Qualify for the WOTC

Individuals hired from the following target groups may qualify for the WOTC:

Veteran

To be considered a qualified veteran for this purpose, an individual must meet these two standards:

  1. Served on active duty, not including training, in the U.S. Armed Forces for more than 180 days or have been discharged or released from active duty for a service-connected disability; and
  2. Not have a period of active duty, not including training, of more than 90 days that ended during the 60-day period concluding on the hiring date.

To be eligible for WOTC, a veteran must also be one of the following:

  1. A member of a family that received Supplemental Nutrition Assistance Program benefits (food stamps) for at least 3-months during the 15-month period ending on the hiring date; OR
  2. Entitled to compensation for a service-connected disability and was
  3. Unemployed for:
  4. At least 4 weeks (but less than 6 months) in the year ending on the hiring date, or

    At least 6 months in the year ending on the hiring date.

Long-Term or Short-Term Temporary Assistance for Needy Families Recipient

  1. Short-term Temporary Assistance for Needy Families (TANF) Recipient – An individual who is a member of a family that:
  2. Received TANF benefits for any 9 months during the 18-month period ending on the hiring date.

  3. Long-term TANF Recipient – An individual who is a member of a family that meets one of the following:
  4. Received TANF benefits for at least 18 consecutive months ending on the hiring date; OR

    Stopped being eligible for TANF payments during the past 2 years because a Federal or state law limited the maximum time those payments could be made, and the individual is hired not more than 2 years after such eligibility ended; OR

    Received TANF benefits for any 18 months after August 5, 1997, and has a hiring date that is not more than 2 years after the end of the earliest 18-month period after August 5, 1997.

Supplemental Nutrition Assistance Program Recipient (Food Stamps)

A Supplemental Nutrition Assistance Program (SNAP) recipient age 18-39 years who is a member of a family that received SNAP benefits (food stamps) for:

  • The 6-month period ending on the hiring date; OR
  • At least 3 of the 5 months ending on the hiring date, in the case of a family member who ceased to be eligible for such assistance under Section 6(o) of the Food Stamp Act of 1977.

Designated Community Resident

An 18-39 year old who lives within one of the federally-designated Rural Renewal Counties or Empowerment Zones.

Vocational Rehabilitation Referral

An individual with a disability who completed or is completing rehabilitative services from a state-certified agency, an Employment Network under the Ticket to Work program, or the U.S. Department of Veteran Affairs.

Ex-Felon

An individual who:

  • Has been convicted of a felony; AND
  • Who is hired within 1 year after the conviction or release date from prison.

Supplemental Security Income Recipient

An individual who received Supplemental Security Income (SSI) benefits for any month that ended during the 60-day period ending on the hire date.

Summer Youth Employee

A 16 or 17 year-old youth who:

  • Works for the employer between May 1st and September 15th; AND
  • Lives within one of the federally-designated Empowerment Zones.
wotc-maximum-tax-credit-amount

4. Maximum Tax Credit Amounts

The maximum tax credit amounts depend on the new employee’s target group and the number of hours worked during the first year of employment.

Veteran Target Group

Worked at least 120 hours but less than 400 hours

Worked at least 400 hours

Receives SNAP (food stamps) benefits

Up to $1,500 (25% of $6,000 of first-year wages)

Up to $2,400 (40% of $6,000 of first-year wages)

Entitled to compensation for service-connected disability:

Hired 1 year after leaving service

Up to $3,000 (25% of $12,000 of first-year wages)

Up to $4,800 (40% of $12,000 of first-year wages)

Unemployed at least 6 months

Up to $6,000 (25% of $24,000 of first-year wages)

Up to $9,600 (40% of $24,000 of first-year wages)

Unemployed:

At least 4 weeks

Up to $1,500 (25% of $6,000 of first-year wages)

Up to $2,400 (40% of $6,000 of first-year wages)

At least 6 months

Up to $3,500 (25% of $14,000 of first-year wages)

Up to $5,600 (40% of $14,000 of first-year wages)

Other WOTC Target Groups

Worked at least 120 hours but less than 400 hours

Worked at least 400 hours

Short-Term TANF Recipient

Up to $1,500 (25% of $6,000 of first-year wages)

Up to $2,400 (40% of $6,000 of first-year wages)

Long-Term TANF Recipient

N/A

Up to $9,000 (over 2 years) (40% of $10,000 of first-year wages and 50% of $10,000 of second-year wages)

SNAP (food stamp) Recipient

Up to $1,500 (25% of $6,000 of first-year wages)

Up to $2,400 (40% of $6,000 of first-year wages)

Designated Community Resident

Up to $1,500 (25% of $6,000 of first-year wages)

Up to $2,400 (40% of $6,000 of first-year wages)

Vocational Rehabilitation Referral

Up to $1,500 (25% of $6,000 of first-year wages)

Up to $2,400 (40% of $6,000 of first-year wages)

Ex-felon

Up to $1,500 (25% of $6,000 of first-year wages)

Up to $2,400 (40% of $6,000 of first-year wages)

SSI Recipient

Up to $1,500 (25% of $6,000 of first-year wages)

Up to $2,400 (40% of $6,000 of first-year wages)

Summer Youth Employee

Up to $750 (25% of $3,000 of first-year wages)

Up to $1,200 (40% of $3,000 of first-year wages)

5. How to Apply

To apply for WOTC, an employer or employer representative must submit IRS Form 8850 and ETA Form 9061 (or 9062, where applicable) within 28 days of the new hires’ start date to Department of Employment Services (DOES) to the attention of the WOTC Coordinator. The 28-day statutory requirement is disallowed only if the US Department of Labor or IRS applies a period of transition relief. If you are an employer representative, IRS Form 2848 or another form of a valid Power of Attorney is required. The application should include documentation to support the verification of the identified target group, if applicable.

States may accept applications via mail, fax, or e-mail or may have an automated WOTC process that accepts electronic submissions.

With electronic solution you can automate otherwise complex application process, eliminate a number of time-consuming steps and meet all deadlines successfully.
wotc-forms

6. WOTC Forms

It is important to understand forms necessary to apply for WOTC: Form 8850, ETA Form 9062, and ETA Form 9061.

Form 8850 – Pre-Screening Notice and Certification Request for the Work Opportunity Credit

Employers use Form 8850 to pre-screen and to make a written request to the state workforce agency (SWA) of the state in which their business is located (where the employee works) to certify an individual as a member of a targeted group for purposes of qualifying for the work opportunity credit.

Submitting Form 8850 to the SWA is but one step in the process of qualifying for the work opportunity credit. The state work opportunity tax credit (WOTC) coordinator for the SWA must certify the job applicant is a member of a targeted group. After starting work, the employee must meet the minimum number-of-hours-worked requirement for the work opportunity credit. Generally, an employer elects to take the credit by filing Form 5884, Work Opportunity Credit. However, a tax-exempt organization that hires a qualified veteran should report the work opportunity credit on Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.

ETA Form 9062 and ETA Form 9061

In addition to filing Form 8850, employers complete and send to state WOTC coordinator either:

  • ETA Form 9062, Conditional Certification Form, if the job applicant received this form from a participating agency (for example, the Jobs Corps); or
  • ETA Form 9061, Individual Characteristics Form, if the job applicant did not receive a conditional certification. Additional information may be required for qualified long-term unemployment recipients.
Simplify the entire process with electronic WOTC questionnaire that merges forms 8850 and 9061 and allows applicants to experience seamless application.

7. WOTC Benefits

The WOTC program is often described as a win-win opportunity for both employers and employees because it gives hard-to-hire individuals who want to work the chance for employment, but also rewards employers who hire them.

WOTC can help organizations increase profitability through reduced tax liability, by impacting their bottom-line and allowing them to invest further resources in their company and employees. WOTC benefits virtually any type and size of business. Whether your business hires 20 or 20,000 employees per year, the WOTC program can significantly impact your margins and profitability.

Employers also gain access to great employees who are proven to perform as well as their colleagues even though their skills do not necessarily come from formal training. Furthermore, employers get to encourage a diverse and high performance workforce while helping workers with barriers to employment prepare for good jobs, ease their transition from job to job and benefit from effective government programs such as WOTC. WOTC decreases the amount federal and state governments spend on entitlements by billions. As a government incentive program, it targets disadvantaged groups in order to help create stronger and more economically stable communities. As a result, WOTC boosts the economy by reducing unemployment rate and individuals’ dependency on government assistance programs funded by taxpayers.

Electronic solution can prevent any possible complications and give members of target groups an opportunity to experience a user-friendly WOTC application.

Maximizing WOTC Benefits

The WOTC certification process is complex and may present a challenge. The IRS requires the WOTC forms to be completed and sent to the State Workforce Agency within 28 days of the employee’s start date. Once you submit the WOTC application, you need to track hours and wages and find out what amount your company can earn for each eligible employee. You also need to learn how to calculate and file for the credit with the IRS. When employers take into consideration the screening questions, risking mistakes on paperwork, all the documentation and deadlines, it is not surprising that some of them wonder if all of that work is worth it.

However, there is a solution that simplifies the entire WOTC process and allows employers to maximize WOTC benefits. With automated platforms for receiving and processing WOTC applications, employers screen new hires through integrated questionnaire and immediately capture the results, reduce processing time without adding staff, improve the capacity to process more applications, prevent the potential for human error, and save millions of dollars in tax credits.

WOTC paperwork can be time consuming and have frustrating deadlines. Also, it can be hard to keep up with Federal regulations and ensure your business gets the maximum savings. Your company can opt for either paper or paperless WOTC application. Automated WOTC solution removes this burden and provides employers with streamlined and organized WOTC process, ensuring the best results in a timely manner. Furthermore, storing information securely online allows employers to obtain files anytime with just one click of a button.With efficient, low-cost and paperless-driven solution, you will eliminate lost tax credit opportunities once and for all.

With efficient, low-cost and paperless-driven solution, you will eliminate lost tax credit opportunities once and for all.
history-of-the-wotc

8. History of the WOTC

Here is how the Work Opportunity Tax Credit came into existence, and how did the reform and renewal process develop in a nutshell.

TJTC, a Predecessor of the WOTC

In 1978, the Federal Government created the Targeted Jobs Tax Credit (TJTC) program to help employers obtain tax credits for hiring individuals who fell into specific “targeted groups” with special employment needs that historically had difficulty in entering the workforce. TJTC created employment opportunities for disadvantaged youths and Vietnam era veterans, food stamp recipients, individuals receiving federally sponsored Welfare and the handicapped. The credit applied directly to the company’s income tax liability, providing tax savings of thousands, or even millions of dollars per year, depending on the company’s size.

Since its inception, TJTC, along with other business tax credits, has been a victim of political and budgetary battles and was always reauthorized temporarily in one-year or multi-year increments.

Welfare Reform

At the end of 1994, Congress permanently ended TJTC, but the credit was re-imagined during the next Congress to meet the needs of welfare reform legislation. When welfare reform was finally enacted in the late summer of 1996, Congress also passed WOTC as a successor credit, along with the companion Welfare-to-Work (WtW) credit. WOTC focused less on youth unemployment and more on moving Welfare recipients, food stamp recipients, residents of Empowerment Zones and disadvantaged veterans into the workforce. For most targeted groups, the initial credit was a maximum of $2100 per qualified employee.

WOTC Renewal and Extension

Since 1996, WOTC has been renewed continuously, followed by retroactive reauthorizations. In addition, over the years Congress has expanded program by adding new permanent and temporary groups, moving existing credits into WOTC and increasing the credits to better serve the needs of some targeted groups.

Merging WtW and WOTC

Over the years, Congress has increased the core credit maximum from $2100 to $2400 per qualified employee. The WtW credit was folded into WOTC, and the maximum credit was increased from $8500 to $9000. To meet new economic and employment challenges, temporary groups were added, creating temporary targeted WOTC categories for areas affected directly by the World Trade Center attacks of 2001, areas affected by Hurricane Katrina in 2006 and high youth unemployment at the height of the recession in 2010.

Vow to Hire Heroes

With the 2011 passage of HR 674, WOTC has become a vehicle to encourage employers to hire Veterans, also known as “Vow to Hire Heroes” or just “VOW”. Veterans hired under VOW can entitle Employers to a very generous maximum credit of up to $9600 for each veteran hired, depending on their pre-employment circumstances. Later in 2011, the VOW provisions expanded the maximum credit employers can claim to up to $24,000 in the first year of a veteran’s employment, while also making WOTC refundable, to a lesser degree, for certain tax-exempt employers.

Protecting Americans from Tax Hikes Act

Most recently, the 2015 Protecting Americans from Tax Hikes Act expanded the WOTC credit further to include workers on long-term unemployment benefits, and extending the WOTC for all eligible populations through the end of 2019.

Five-Year Extension (2015 – 2019)

Like other popular business incentives and IRC provisions, including the Research & Development Credit, WOTC provisions are technically of limited duration, even though the credit itself has been renewed consistently since its inception and most extensions include retroactive provisions. The current WOTC law applies to wages paid to eligible workers hired before December 31, 2019.

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9. The Future of WOTC

The WOTC program has gone through several expirations and renewals by Congress. Most recently, the legislation retroactively extended the WOTC program from January 1, 2015 through the end of 2019.

There is good reason to believe that WOTC will be renewed, and perhaps even made permanent in the future. Its supporters see the credit as a low-cost means of reducing government dependence and spending overall on both the federal and state level while giving high risk individuals an opportunity to go back to work.

WOTC is not only a tax break but also a flexible policy tool and a cost effective hiring program. Its benefits outweigh the costs for both state and federal governments. It reduces poverty and expands the workforce while increasing private sector employment. Given its huge benefits and low drawbacks, not extending WOTC in the future would result in numerous problems for American workers, American businesses, and higher government spending.

10. High time to start applying for WOTC

As a successful tax incentive, WOTC encourages workplace diversity and brings jobs to workers who need them, allowing them to overcome economic dependency. It benefits different types of businesses as it significantly reduces federal tax liability and allows employers to save up money for investing elsewhere. Furthermore, federal spending on the WOTC program saves money spent on public assistance programs.

With a historic five-year renewal, WOTC will remain in effect through December 31, 2019, providing an excellent opportunity for employers. Despite its advantages, some employers don’t consider applying due to complex procedures. However, modern approach to WOTC processing through automation can simplify its complexity, eliminate the obstacles to business growth, reduce costs and errors, increase control and save resources.

Employers need to start utilizing technology and maximize their savings. It is easier than ever to take part in programs such as WOTC, which provide great benefits to businesses and, even more importantly, can make a huge difference for members of disadvantaged groups.

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