Work Opportunity Credit Explained
Table of Contents
Key Takeaways:
- The Work Opportunity Tax Credit (WOTC) is a federal tax credit offered by the IRS to eligible employers who hire employees from target groups that have historically struggled to secure stable employment.
- For an employer to be eligible to claim the WOTC, they must hire and retain an employee from an IRS-determined target group, such as those who are a qualified IV-A recipient, ex-veteran, ex-felon, designated community resident (DCR), vocational rehabilitation referral, qualified summer youth employee, qualified supplemental nutrition assistance program (SNAP) benefits recipient, qualified supplemental security income (SSI) recipient, long-term family assistance recipient, or qualified long-term unemployment recipient.
- In order to claim the work opportunity tax credit, employers must receive pre-screening certification from a Designated Local Agency, known as a State Workforce Agency or SWA, to ensure that the employee meets the qualifications of one of the target groups as defined by the IRS.
- The employer must submit Form 8850 to the SWA within 28 days of the employee’s start date, along with either ETA Form 9062, Conditional Certification, if the job applicant received their form from a participating agency, ETA Form 9061, Individual Characteristics Form (ICF), if the job applicant did not receive conditional certification, or ETA Form 9175, Long-Term Unemployment Recipient Self-Attestation Form, if the job applicant is qualified as a long-term unemployment recipient.
What Is The Work Opportunity Credit?
The Work Opportunity Tax Credit (WOTC) is an IRS tax credit that eligible employers can claim if they hire and retain qualified employees from groups that have historically struggled to secure stable employment. The purpose of this qualified opportunity tax credit is to incentivize the hiring of workers and community residents who have lacked employment opportunities by allowing employers to save money through tax credits.
Work Opportunity Tax Credit Qualifications
In order to qualify for the WOTC, employers must have hired and retained an employee from one of the IRS-determined target groups who have a history of facing employment barriers. Some of the target groups that are considered eligible employees under the WOTC program include:
- Qualified IV-A Recipient
- Qualified Veteran
- Qualified Ex-Felon
- Designated Community Resident (DCR)
- Vocational Rehabilitation Referral
- Qualified Summer Youth Employee
- Qualified Supplemental Nutrition Assistance Program (SNAP) Benefits Recipient
- Qualified Supplemental Security Income (SSI) Recipient
- Long-Term Family Assistance Recipient
- Qualified Long-Term Unemployment Recipient
Business WOTC Eligibility
Businesses and companies in any industry may qualify to claim the work opportunity tax credit for eligible employees that are hired, including both taxable and certain tax-exempt employers in the U.S. However, while taxable employers are able to claim the work opportunity credit against income taxes, qualifying tax-exempt employers are only able to claim the WOTC against payroll taxes and wages paid to people within the Qualified Veteran targeted group.
Which Employees Are Not Eligible For The WOTC?
There are certain instances in which there are exclusions to the list of target groups eligible for the WOTC program.
For example, suppose an employer rehires an employee who used to work there, a dependent or family member, or someone who will become a majority business owner, even if the employee is a member of one of the eligible target groups. In that case, they may be unable to claim the work opportunity credit for that individual.
Work Opportunity Credit Pre-Screening And Certification
WOTC Certification Additional Requirements
There are certain additional requirements that must be completed before the WOTC pre-screening process is complete and the tax credit can be claimed, such as submitting another form to their state WOTC coordinator.
The employer will have to submit one of the following forms:
- ETA Form 9062, Conditional Certification, in the situation where the job applicant received their form from a participating agency.
- ETA Form 9061, Individual Characteristics Form (ICF), in the situation where the job applicant did not receive conditional certification.
- ETA Form 9175, Long-Term Unemployment Recipient Self-Attestation Form, in the situation where the job applicant is qualified as a long-term unemployment recipient.
How To Claim The Work Opportunity Tax Credit
After receiving the required certification using Form 8850, an eligible employer can apply for the work tax credit opportunity by filling out
1. Contact your local unemployment office or the SWA for a contact list of potential job applicants who are a part of the target group.
2. Complete Form 8850 with the potential employee before the job offer date to ensure the applicant qualifies as a member of one of the target groups.
3. Submit Form 8850 to your state’s SWA within 28 days of the new hire’s start date with the appropriate ETA Form 9062, 9061, or 9175.
4. Track the WOTC-certified employee’s work hours to ensure they work at least 120 hours during their first year as an employee so that the employer can claim the tax credit, or 400 hours for TANF recipient employees.
5. File IRS Form 5584, Work Opportunity Credit, to claim the tax credit.
If you have any questions about your eligibility for the work opportunity tax credit or other tax breaks that can bring you success in reducing your tax liability during the tax season, seeking advice from an experienced tax professional can put you at an advantage. Set up your free consultation with the experts at Ideal Tax and get started on your tax-saving journey today.
Luis serves as the Director of Operations for Ideal Tax, overseeing a multifaceted team including case management, tax professionals, document specialists, customer support, training, and development.
