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Takeaway
The Work Opportunity Tax Credit (WOTC) is a federal tax incentive that rewards employers for hiring and employing individuals from specific targeted groups. Read how it works, who qualifies and how to claim a credit for your company.
Everyone deserves a chance to succeed. Unfortunately, today’s talent acquisition doesn’t always reflect that.
The Work Opportunity Tax Credit (WOTC) helps Americans by rewarding companies for more equitable hiring. The value of the WOTC can vary depending on where your business operates and who it hires. Therefore, it’s important to know:
- how WOTC works
- how it affects your organization
- how the right HR tech makes maximizing this and other tax credits easier
Lean on these questions — and their answers — to kick-start and sharpen your WOTC expertise.
What is WOTC?
WOTC is a federal tax credit that incentivizes businesses to hire from groups that have “faced significant barriers to employment.” It was created through the Small Business Job Protection Act of 1996.
Because WOTC is a dollar-for-dollar reduction — not a deduction — businesses can greatly reduce or even eliminate their federal income tax liability, while lowering their effective corporate tax rate.
According to the IRS, the WOTC boosts “diversity and facilitates access to good jobs for American workers.” Other benefits include:
- reduced tax liability for private and for-profit employers
- opportunities for people to improve their quality of life
- more equitable workplaces with broader perspectives
While the WOTC lightens businesses’ tax burden, it is ultimately designed to help prospective employees break a cycle of unemployment.
How does the work opportunity tax credit (WOTC) work?
To file for the WOTC, employers must first pre-screen and certify new hires through IRS Form 8850 and ETA Form 9061, which are typically submitted to the state workforce agency within 28 days of an employee’s start date. Employers must then secure certification verifying the new hire’s status as a member of a targeted group. Once certified, taxable employers claim the WOTC as a general business credit against their income taxes, while tax-exempt employers claim the WOTC against their payroll taxes.
What is WOTC screening?
WOTC screening is the process employers go through to determine if a new hire is eligible for the program. Employers can initiate the screening process by having new hires complete a pre-screening questionnaire to help identify potential eligibility. To request certification, employers must submit IRS Form 8850 (Pre-Screening Notice and Certification Request) and ETA Form 9061 (Individual Characteristics Form) to the state workforce agency within 28 days of an employee’s start date. The state workforce agency will review the forms and verify a new hire’s eligibility. By obtaining certification, employers can claim the WOTC credit on their annual tax return.
WOTC 8850 Form
Form 8850 is a crucial document in the WOTC screening process. The form requires employers to provide information about the new hire, including their name, address and date of birth as well as the employer’s name and address. The new hire must also complete a questionnaire on the form, which helps determine their eligibility for the WOTC program.
WOTC 9061 Form
ETA Form 9061 is another essential document in the WOTC screening process. This form is used to collect additional information about the new hire’s characteristics, such as their age, disability status and veteran status. The form is typically completed by the new hire and submitted to the employer, who then attaches it to the Form 8850 and submits it to the state workforce agency.
How do employers benefit from WOTC?
Hiring from WOTC groups pays off in more ways than one. Not only can employers claim valuable federal tax credits, but they’ll also be tapping into a rich source of diverse talent, skills and perspectives that can help drive innovation and growth.
Who qualifies for WOTC?
Today, WOTC encompasses 10 “targeted groups” and is authorized through Dec. 31, 2025, per the Consolidated Appropriations Act of 2021.
Though WOTC applies to specific individuals, the number of candidates who qualify may be larger than you think. According to Bloomberg Tax, 1 in 5 new hires could be eligible under the program. Plus, the IRS confirms businesses of any size may claim WOTC, including certain tax-exempt employers.
Make sure you’re not leaving money on the table! Here’s a complete list of the 10 targeted groups currently eligible for WOTC claims:
1. Ex-felons
This refers to employees who are hired within a year of being convicted of or released from prison for a felony.
2. IV-A recipients
An individual whose family receives aid through a state program funded by Part A of Title IV of the Social Security Act (hence, “IV-A”) may qualify for WOTC claims. (This aid is sometimes called TANF, or Temporary Assistance to Needy Families.)
To qualify, the candidate must receive at least nine months of aid during an 18-month period that ends with their hire date.
3. Long-term family assistance recipients
This refers to a candidate whose family meets one of these conditions:
- Received IV-A aid for 18 consecutive months up to their hiring date
- Received IV-A aid for 18 consecutive months since Aug. 5, 1997, and continued to receive benefits for no more than two years before their hiring date
- Became ineligible for an IV-A program because they met the maximum payments they could receive within two years before their hiring date
4. Qualified veterans
WOTC can help transition certain veterans into the civilian workforce if they meet any of these conditions:
- their family received food stamps for at least three months during a 15-month period before their hiring date
- they were unemployed for at least four weeks within a year of their hiring date
- they are entitled to military disability and were hired within a year of leaving active duty
5. Designated community residents (DCR)
DCRs are candidates who reside in empowerment zones or rural renewal counties when they’re hired. Both areas are designated by economic distress — such as from population loss — identified by the federal government.
6. Vocational rehabilitation referrals
Candidates with a physical or mental disability may be referred to an organization during or after completing rehabilitation.
Qualifying rehabilitation services are defined by the:
7. Summer youth employees
To qualify as a summer youth employee, a candidate must reside in an empowerment zone and be at least 16, but under 18 as of their hiring date (or May 1 of the applicable year). These hires may work only between May 1 and Sept. 15.
8. Supplemental Nutrition Assistance Program (SNAP) recipients
Any individual between the ages of 18 and 40 qualifies for WOTC if their family received SNAP benefits for either six months or three of the past five months up to their hiring date.
9. Supplemental Security Income (SSI) recipients
People who have received SSI within 60 days prior to their hiring date count toward WOTC claims. This helps certain candidates overcome the limitations of a fixed income.
10. Long-term unemployment recipients
Candidates who were unemployed for at least 27 consecutive weeks before they were hired and received any government assistance during their unemployment period qualify for WOTC.
What types of employees are ineligible for the Work Opportunity Tax Credit?
Certain employees are not eligible for the WOTC, including relatives of the employer, individuals who have previously worked for the employer and those who are rehired after a brief period of unemployment. Employers can explore alternative tax credits, such as the Empowerment Zone Employment Credit or the Indian Employment Credit, to incentivize hiring and support their business goals.
How much money in tax credits can employers get from WOTC?
In most cases, WOTC equals 40% of up to $6,000 in wages a qualifying employee earns during their first year. The earnings also must represent at least 400 hours of work. This means the maximum tax credit is usually $2,400.
Some situations can reduce and significantly raise WOTC’s value. For instance, employees who work less than 400 hours, but at least 120, may qualify for an organization to receive 25% credit. Businesses hiring certain qualified veterans may be eligible for up to a $2,400 credit per each applicable employee.
How do companies claim WOTC?
Like other tax credits, WOTC can be a boon to qualifying businesses — provided they apply for it in time. Organizations must submit a WOTC verification request to the appropriate state agency within 28 days of the covered employee’s start date.
Generally, the employer and the job applicant must jointly complete IRS Form 8850, in addition to an ETA Form 9061 or an ETA Form 9062. According to the U.S. Department of Labor, Form 9062s are generally provided by job placement or partnering agencies. Employees who aren’t registered with such an agency will likely need to file Form 9061.
Since qualification may shift across states, HR should always consult their state’s or states’ workforce agencies to verify their complete WOTC requirements.
How can the right HR tech help businesses with WOTC?
Unexpected growth, turnover and other factors may spur organizations to hire quickly. But that doesn’t mean they should miss out on tax breaks. A tax credits service backed by specialized experts and easy-to-use HR tech weaves WOTC into the preemployment process.
First, the service screens candidates for WOTC eligibility from their job applications, then calculates the potential credits before an employer makes a hiring decision. It can even verify qualifying employees who were recently hired, eliminating any blind spot for possible credits. Keep in mind that in order to claim WOTC credits, the necessary paperwork must be completed at the preemployment stage. If this step is missed, it will not be possible to complete the forms retroactively, and the credits may be forfeited.
Some services even conduct the eligibility search at no cost to the organization. If no credits are found, the company doesn’t have to pay a penny for the search.
Once an eligible new hire is onboarded, the service applies and administers the appropriate credits on the business’ behalf. HR professionals are automatically notified of required program deadlines and other important dates. This helps ensure employers reap the benefits of WOTC without adding unnecessary work to HR’s plate.
WOTC encourages businesses to hire diversely while giving millions of Americans the means to not just work but thrive. And the right tools make sure no tax-credit opportunity is overlooked.
Explore Paycom’s tax credits service to see how it helps maximize your business’s WOTC eligibility, potentially saving your company thousands without piling more on your workload.
FAQ
Is WOTC safe?
Yes, the WOTC is a safe and legitimate tax credit program administered by the IRS and state workforce agencies.
Can an employer make the WOTC form mandatory?
No, the WOTC form is voluntary. Employers should inform applicants about the benefits of completing the form and how it may impact their eligibility for the WOTC, but ultimately, the decision to complete the form is up to the applicant.
Is the WOTC program worth it?
Employers who are considering participating in the program should carefully weigh the potential benefits and drawbacks and consult with a tax professional or other expert to determine whether the program is right for them.
How can an employer claim the WOTC?
An employer can claim the WOTC by completing and submitting the necessary forms, including IRS Form 8850 and either ETA Form 9061 or ETA Form 9062 to the IRS. The employer must also obtain certification from the state workforce agency that the employee is a member of a targeted group.
Should I fill out the WOTC questionnaire?
If you are a job applicant who may be eligible, you can fill out the questionnaire to determine your eligibility. This will help your employer determine if they can claim the credit for hiring you.
Are WOTC credits refundable?
No, they are not refundable.
For which employees may an employer claim the WOTC?
An employer may claim the WOTC for employees who are members of targeted groups, including veterans, individuals with disabilities and those who receive certain types of government assistance.
How do I file a WOTC certification request?
To file a WOTC certification request, an employer must submit Form 8850 and either Form 9061 or Form 9062 to the state workforce agency.
When did the WOTC start?
The WOTC was first introduced in 1996 as part of the Small Business Job Protection Act.
Are both taxable and tax-exempt employers of any size eligible to claim the WOTC?
Yes, both taxable and tax-exempt employers of any size are eligible to claim the WOTC, as long as they meet the necessary requirements and follow the correct procedures.
Can the WOTC claims and payment processes be automated?
Yes, the right HR tech can automate the WOTC claims and payment processes, making it easier for employers to claim the credit and reducing the risk of errors or missed deadlines.
