The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers that hire individuals from certain “targeted groups” that have consistently faced significant barriers to employment. An employer may claim the WOTC for wages paid to these individuals during their first year of employment, as long as they are hired on or before Dec. 31, 2020, and work at least 120 hours for the employer during that first year. WOTC is calculated as:
These amounts are subject to maximums that depend on the employee’s targeted-group classification.
Enacted in 2007, the WOTC was initially set to expire at the end of 2019 but was later extended to 2021. Under the Consolidated Appropriations Act of 2021, the expiration was extended another four years. This allows employers to claim it for employees hired on or before Dec. 31, 2025. This Compliance Overview contains more information about the WOTC, as provided by the Internal Revenue Service.
Links And Resources Regarding Work Opportunity Tax Credits
What is the Purpose of The Work Opportunity Tax Credit?
The Work Opportunity Tax Credit provides an incentive for employers to hire individuals in certain groups that have faced employment barriers.
How Can I Obtain a Certification for WOTC?
To claim the WOTC, an employer must obtain certification from a state workforce agency that an individual is a member of a targeted group.
28-day Certification Requests
If an employer has not obtained certification prior to an individual’s hire date, it must file a Form 8850 with its state workforce agency within 28 days after the hire date.
120 hours of service is a minimum requirement for WOTC
An employee must perform at least 120 hours of services for an employer before the employer may claim the WOTC for that employee.
What are the Groups that the Work Opportunity Tax Credit Targets?
The table below lists and describes the types of individuals who fall within the “targeted groups” for purposes of the WOT credit.
What Tax Form Do you Use to File A WOTC?
An employer must obtain certification that an individual is a member of the targeted group before claiming the credit. An eligible employer must file Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit), with the appropriate state workforce agency within 28 days after the eligible worker begins work.
Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850.
Limitations on the WOTC
The credit is limited to the amount of the business income tax liability or social security tax owed. A taxable business may apply for the credit against its business income tax liability—the normal carry-back and carry-forward rules apply. The Instructions for Form 3800, General Business Credit, provide more details. For qualified tax-exempt organizations, the credit is limited to the amount of employer social security tax owed on wages paid to all employees for the period the credit is claimed.
Claiming the Work Opportunity Tax Credit?
Qualified tax-exempt organizations will claim the credit on Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, as a credit against the employer’s share of Social Security tax. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return.
After the required certification is secured, taxable employers claim the tax credit as a general business credit on Form 3800 against their income tax by filing the following:
Qualified tax-exempt organizations described in Internal Revenue Code (IRC) Section 501(c) and exempt from taxation under IRC Section 501(a) may claim the credit for qualified veterans who begin work on or after Dec. 31, 2014, and before Jan. 1, 2021.
After the required certification (Form 8850) is secured, tax-exempt employers claim the credit against the employer’s social security tax by separately filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.
The filling of form 5584-C should be conducted after the State Unemployment Tax Return for the period the credit is claimed. The IRS recommends that qualified tax-exempt employers do not reduce their required deposits in anticipation of any credit. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return.
Employers must keep copies of the forms it files for the WOTC, along with any related correspondence between them and their state WOTC coordinators. These documents may need to be stored as long as it takes for the administration of the credit. Records that support the credit usually must be kept for three years from the date an income tax return claiming the credit.
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Source: Internal Revenue Service