Work Opportunity Tax Credit (WOTC)

Many businesses may be hiring certain qualified individuals and missing out on a significant tax credit known as The Work Opportunity Tax Credit.  The WOTC is available to employers that hire individuals who are economically challenged and typically have difficulties gaining employment. This tax credit can generally equal 25% or 40% of a new employee’s first-year wages up to the maximum tax credit between $750 and $9,600 per qualifying employee depending on the target group to which the employee belongs.

What target groups qualify for WOTC tax credits for employers?

Please visit the United States Department of Labor website for specific qualification descriptions for each target group.

1. Veterans:

  • Receiving SNAP benefits: 25% of $6,000 of first-year wages if worked at least 120 hours but less than 400 hours. 40% of $6,000 of first-year wages if worked at least 400 hours.
  • Entitled to compensation for service-connected disability:
    • Hired 1 year after leaving service: 25% of $12,000 of first-year wages if worked at least 120 hours but less than 400 hours. 40% of $12,000 of first-year wages if worked at least 400 hours.
    • Unemployed at least 6 months: 25% of $24,000 of first-year wages if worked at least 120 hours but less than 400 hours. 40% of $24,000 of first-year wages if worked at least 400 hours.
  • Unemployed:
    • At least 4 weeks: 25% of $6,000 of first-year wages if worked at least 120 hours but less than 400 hours. 40% of $6,000 of first-year wages if worked at least 400 hours.
    • At least 6 months: 25% of $14,000 of first-year wages if worked at least 120 hours but less than 400 hours. 40% of $14,000 if worked at least 400 hours.

2. Temporary Assistance for Needy Families (TANF) Recipients:

  • Short-Term TANF Recipients: 25% of $6,000 of first-year wages if worked at least 120 hours but less than 400 hours. 40% of $6,000 of first-year wages if worked at least 400 hours.
  • Long-Term TANF Recipients: 40% of $10,000 of first-year wages and 50% of $10,000 of second-year wages if worked at least 400 hours during each year.

3. SNAP (food stamp) Recipients: 25% of $6,000 of first-year wages if worked at least 120 hours but less than 400 hours. 40% of $6,000 of first-year wages if worked at least 400 hours.

4. Designated Community Residents: 25% of $6,000 of first-year wages if worked at least 120 hours but less than 400 hours. 40% of $6,000 of first-year wages if worked at least 400 hours.

5. Vocational Rehabilitation Referral: 25% of $6,000 of first-year wages if worked at least 120 hours but less than 400 hours. 40% of $6,000 of first-year wages if worked at least 400 hours.

6. Ex-Felons: 25% of $6,000 of first-year wages if worked at least 120 hours but less than 400 hours. 40% of $6,000 of first-year wages if worked at least 400 hours.

7. Supplemental Security Income Recipients: 25% of $6,000 of first-year wages if worked at least 120 hours but less than 400 hours. 40% of $6,000 of first-year wages if worked at least 400 hours.

8. Summer Youth Employees: 25% of $3,000 of first-year wages if worked at least 120 hours but less than 400 hours. 40% of $3,000 of first-year wages if worked at least 400 hours.

Exceptions to the above target groups which do not qualify for WOTC are relatives and dependents of the employer, former employees, regardless of time since last employed (except for summer youth), and majority owners of the business.

How employers can claim WOTC tax credits:

The key to claiming these credits is proper documentation and timely reporting. Prior to offering employment to an individual who may meet the qualifications of WOTC, IRS Form 8850 along with Department of Labor ETA Form 9061 must be completed.

  • Page 1 of Form 5580 is to be completed by the applicant and page 2 by the employer.
  • ETA Form 9061 may be completed by the employer.
  • The forms must then be submitted together with necessary documentation to the State Workforce Agency (SWA) of the state in which the business is located no later than the 28th calendar day after the employee’s date of hire.
  • The SWA will issue final determination which will indicate whether the new employee is certified as meeting the eligibility as being a member of one of the WOTC target groups.

Once employers receive certification of eligibility from the SWA and meet requirements for the Minimum Employment Period, which is the number of hours required to be worked by the employee (at least 120 hours in the first year of employment) they can apply for the credit by completing and submitting Form 5884 to the IRS.

KMM and Crossroads are here to help!

If you have hired, or plan to hire, an eligible employee, don’t let the filing process keep you from reaping the reward.  Crossroad Payroll & Bookkeeping Services, a KMM company, can assist you with the application forms for eligible employees.  And, of course, KMM can assist you with filing for the credit.  Contact us to learn more or get started today!

Written by: Austin Anderson