Work Opportunity Tax Credit Extended

What is the Work Opportunity Tax Credit?

The WOTC is a federal tax credit available to employers who hire and retain individuals from specific targeted groups that have historically faced significant barriers to employment. The credit’s purpose is to help these individuals move from economic dependency into sustained employment, while also rewarding businesses for promoting a more diverse workforce. Since its enactment in 1996, Congress has frequently reauthorized the WOTC program, with the latest extension ensuring it remains in effect for hires made through the end of 2025.

The Work Opportunity Tax Credit is calculated at a rate of 25% for a qualified employee’s first-year wages if they work at least 120 hours but fewer than 400 hours. This percentage increases to 40% for employees who work more than 400 hours. For most groups, the maximum amount of wages eligible for the credit is capped at $6,000, which allows for a maximum credit of $2,400 per employee in their first year. For certain qualified veterans, up to $24,000 in wages can be used to calculate the WOTC, offering up to a $9,600 credit for some veterans. The credit is not available for rehired employees. Generally, taxable employers can carry any unused credit back for one year or forward for up to 20 years.

Who Qualifies for the WOTC?

To claim the WOTC, an employer must first hire an individual who is a member of one of the 10 targeted groups. These groups include:

• Qualified Veterans: This group includes veterans with service-connected disabilities, those who have received unemployment compensation, or those who are members of families that receive certain public assistance.
• Recipients of Temporary Assistance for Needy Families (TANF): Individuals who are members of families receiving TANF benefits.
• Supplemental Nutrition Assistance Program (SNAP) Recipients: Individuals aged 18 to 39 who are members of families receiving SNAP benefits.
• Vocational Rehabilitation Referrals: Individuals with a physical or mental disability who are referred to the employer by a state vocational rehabilitation agency or a qualified employment network.
• Ex-Felons: Individuals who have been convicted of a felony and are hired within one year of their conviction or release from prison.
• Summer Youth Employees: Individuals aged 16 or 17 who live in an Empowerment Zone and work for the employer between May 1 and September 15.
• Supplemental Security Income (SSI) Recipients: Individuals who have received SSI benefits for any month within a 60-day period ending on their hiring date.
• Designated Community Residents: Individuals aged 18 to 39 who live within an Empowerment Zone or a Rural Renewal County.
• Long-Term Unemployment Recipients: Individuals who have been unemployed for at least 27 consecutive weeks and have received unemployment compensation during that period.
• Long-Term Family Assistance Recipients: Individuals who are members of families receiving long-term assistance under certain federal programs.

How do Businesses Claim the Credit?

To take advantage of the WOTC, employers must follow a specific process. The most critical step is to submit IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to the designated local agency (usually a state workforce agency) within 28 days of the eligible employee’s first day of work. Failure to meet this deadline will result in the denial of the credit. After the state agency certifies the employee as a member of a targeted group, the employer can then calculate and claim the credit on their federal income tax return using IRS Form 5884, Work Opportunity Credit, and then claim it on Form 3800, General Business Credit. Tax-exempt organizations can claim the WOTC against their payroll taxes for hiring qualified veterans using Form 5884-C.

Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.