What is Work Opportunity Tax Credit (WOTC), Should you apply for WOTC?

Work Opportunity Tax Credit

WOTC which stands for work opportunity tax credit is a federal tax credit that is available to all employers who retain and hire qualified veterans and other individuals from certain groups that have historically faced employment barriers. By creating economic opportunities, this program also helps lessen the burden on other government assistance programs.

The WOTC (work opportunity tax credit) is jointly administered through the Internal Revenue Service (IRS) by the U.S. Treasury and the Department of Labor (DOL). The Internal Revenue Service (IRS) is responsible for claiming the credit by managing tax-related requirements while the Department of Labor (DOL) grants policy guidance and funding to state agencies that look after the certification process for work opportunity tax credit.

The PATH Act of 2015 called the Protecting Americans from Tax Hikes Act allows all the employees who are eligible to claim the Work Opportunity Tax Credit from targeted groups hired between Dec. 31, 2014, and Dec. 31, 2020. To know whether a business can claim the credit, the category of workers it hires must be known, the wages of those workers must be paid in their first year of employment, and also depends on the number of hours they work.

Types of employees eligible for Work Opportunity Tax Credit

An employer can only take advantage of the Work Opportunity Tax Credit if they hire employees from certain targeted groups such as:

• Individuals who receive temporary assistance for needy families (TANF) benefits under Part A, Title IV of the Social Security Act
• Qualified veterans, including those receiving supplemental nutrition assistance program (SNAP) benefits, those who are unemployed, and those who are unemployed and entitled to compensation from a service-connected disability 
• Qualified ex-felons
• Designated community residents who are at least 18 and under 40 and live in an empowerment zone, enterprise community, or renewal community
• Individuals with physical or mental disabilities who have been referred for work after completing rehabilitative services
• Summer youth employees
• Supplemental nutrition assistance program (SNAP) recipients
• Supplemental Security Income (SSI) recipients
• Long-term family assistance recipients
• Qualified long-term unemployment recipients

Certification and screening process for Work Opportunity Tax Credit

Before claiming for Work Opportunity Tax Credit an employer must receive certification from a State Workforce Agency (SWA) that the new hires done by the business meet the qualifications of one of the target groups. This certification can be obtained using IRS Form 8850 and one of two forms from the Department of Labor. 

The Employment and Training Administration’s first form, namely 9061 also called the Individual Characteristics Form (ICF), provides information regarding the answers provided by the applicant in the WOTC questionnaire. While the second ETA Form 9062, is the Conditional Certification Form for all those applicants who have been pre-screened for Work Opportunity Tax Credit by a State Workforce Agency (SWA). Both these forms must accompany Form 8850 submissions.

Form 8850

Employers who have screened the employees for Work Opportunity Tax Credit have 28 days for a qualified employee from the start date to send Form 8850 to the applicable State Workforce Agency(SWA), also known as the Pre-Screening Notice and Certification Request for the Work Opportunity Tax Credit. The first page of the form which outlines the conditions that someone from one of the target groups must meet to qualify for the program must be filled by the applicant on or before the day of the job offer. The second page of the form is intended for employers on which they will provide their business contact information and the applicant’s key employment-related dates.

Work Opportunity Tax Credit Questionnaire

Page number one of Form 8850 contains the questionnaire of the Work Opportunity Tax Credit. It contains questions related to their previous life such as if they have worked in any military service, their participation in any government assistance programs, recent unemployment, and other targeted questions.

Which employees qualify for the Work Opportunity Tax Credit

An employer who has hired an individual as an employee who has historically faced barriers in employment and is a part of one of the target groups determined by the IRS.

Employees not eligible for the Work Opportunity Tax Credit program

An employer who hires a family member or dependent, a former employee, or someone who will be a majority owner in the business may not be eligible for the Work Opportunity Tax Credit program for that particular employee even if the individual is a member of an eligible target group.

Which businesses are eligible for the Work Opportunity Tax Credit?

Any business, irrespective of the industry and size is eligible for the Work Opportunity Tax Credit under the program. And there is also no limit for the number of employees a business can hire for being eligible for the Work Opportunity Tax Credit program. And apart from all this, there is no cap set for the number of credits that can be claimed by the business under the Work Opportunity Tax Credit program.

How can we calculate WOTC?

The amount of the WOTC is calculated as a percentage of qualified wages paid to an eligible worker during the eligible employee’s first year of employment. An employer may claim a credit equal to 40% of the eligible employee’s qualified wages if the eligible worker works at least 400 hours during the first year of employment. If the eligible employee works fewer than 400 hours but at least 120 hours, the employer may claim a credit equal to 25% of the eligible employee’s wages. If the eligible employee works fewer than 120 hours, an employer may not claim the WOTC.

Process for claiming the Work Opportunity Tax Credit by the employer:

1. Find eligible applicants- Contact the State Workforce Agency(SWA) or local unemployment office to get the list of potential job applicants.
2. Screen applicants- Have applicants complete the questionnaire on the first page of Form 8850 on or before the job offer date to see if they qualify for one of the Work Opportunity Tax Credit target groups.
3. File documents- Submit the completed Form 8850 and either ETA Form 9061 or 9062 to the State Workforce Agency(SWA) within 28 days of the eligible new hire’s start date.
4. Monitor hours worked and qualified wages paid- Work Opportunity Tax Credit-certified employees must work at least 120 hours during the first year of employment for an employer to claim credits, which are calculated as a percentage of qualified wages. Employees in the TANF recipient category must work 400 hours.
5. Claim the tax credit- Use IRS Form 5884 when filing annual tax returns to claim the Work Opportunity Tax Credit.
6. Keep accurate records- Make copies of all the forms and supporting documents submitted to the State Workforce Agency(SWAs) and correctly track employee hours in case the IRS decides to audit the credits claimed.

Advantages of the Work Opportunity Tax Credit

Some of the advantages of the Work Opportunity Tax Credit include:

• Tax credits based on work opportunities help businesses decrease their liability on tax which can be helpful to the bottom line. 
• Work Opportunity Tax Credit also increases diversity in hiring. From a worker's perspective, this tax credit could make finding work possible for certain groups that have otherwise been overlooked in the hiring process.

How to claim the Work Opportunity Tax Credit for an Employee

Once an employee is certified, employers can claim the work opportunity tax credit on their income tax returns by filling the following forms: 

• IRS Form 5884, Work Opportunity Credit
• IRS Form 3800, General Business Credit
• IRS Form 1040, 1040-SR, 1041, 1120, etc.

The employer can calculate the credit by counting the number of hours worked by the employee and their wages for the first year of employment. The amount of credit an employer can claim is limited to the amount of the business income tax or Social Security tax owed.

How much-estimated credit each category can avail?

• Worked at least 120 hours but less than 400 hours- Up to $1,500 (25% of $6,000 of first-year wages).

• Worked at least 400 hours- Up to $2,400 (40% of $6,000 of first-year wages).

• Short-Term TANF Recipient- Up to $1,500 (25% of $6,000 of first-year wages) for at least 120 hours but less than 400 hours and Up to $2,400 (40% of $6,000 of first-year wages) for those who worked at least 400 hours.
• Long-Term TANF Recipient- Up to $9,000 (over 2 years) (40% of $10,000 of first-year wages and 50% of $10,000 of second-year wages) for those who worked for at least 400 hours.

• Designated Community Resident(An 18-39-year-old who lives within one of the federally-designated Rural Renewal Counties or Empowerment Zones)- Up to $1,500 (25% of $6,000 of first-year wages) for those who worked at least 120 hours but less than 400 hours and Up to $2,400 (40% of $6,000 of first-year wages) for those who worked at least 400 hours.

• 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)- Up to $1,500 (25% of $6,000 of first-year wages) for those who worked at least 120 hours but less than 400 hours and Up to $2,400 (40% of $6,000 of first-year wages) for those who worked at least 400 hours.
• Ex-felon(Has been convicted of a felony, and Who is hired within 1 year after the conviction or release date from prison)- Up to $1,500 (25% of $6,000 of first-year wages) for those who worked at least 120 hours but less than 400 hours and Up to $2,400 (40% of $6,000 of first-year wages) for those who worked at least 400 hours.
• SSI 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)- Up to $1,500 (25% of $6,000 of first-year wages) for those who worked at least 120 hours but less than 400 hours and Up to $2,400 (40% of $6,000 of first-year wages) for those who worked at least 400 hours.
• 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)- Up to $750 (25% of $3,000 of first-year wages)  for those who worked at least 120 hours but less than 400 hours and Up to $1,200 (40% of $3,000 of first-year wages) for those who worked at least 400 hours.

How can Nskt Global help?

NSKT Global is one of the top consulting firms that provides services of Work Opportunity Tax Credit. We at NSKT Global help in clearing the screening for the WOTC and improving compliance rate and simply data collection. We help save time and reduce the stress of the client who wishes to apply for the WOTC. We also offer benchmarking and analytics tools that can help employers forecast their tax credits.

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