The Work Opportunity Tax Credit (WOTC) is a federal tax benefit offered to businesses that hire individuals from groups who often struggle to find job opportunities. Employers can save money on taxes while meeting their company’s needs, helping those in need of work who may be having trouble getting back on their feet.
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Key takeaways about the WOTC
- WOTC offers tax credits of up to $9,600 for hiring individuals from targeted groups.
- Employers must submit certification forms within 28 days of an eligible employee’s start date.
- The program benefits both businesses and individuals facing employment barriers.
Before you can benefit from this tax credit, you need official proof that your newly hired employee belongs to one of these targeted groups. Once they have this certification, for-profit businesses can reduce their income taxes, and nonprofits can reduce their payroll taxes. As an employer, you have until December 31, 2025, to claim the WOTC.
This article discusses the WOTC’s specifics, its purpose, and how businesses can claim this federal tax credit.
Purpose of WOTC
The WOTC serves two purposes: to provide a tax credit of up to $9,600 for employers and to promote hiring individuals from disadvantaged groups.
Who is eligible for the WOTC?
Employers of all sizes can claim the WOTC. For your business to qualify, a designated local or state workforce agency must certify that the hired individual belongs to a specified group.
Targeted groups
You can claim the WOTC for hiring individuals from a qualified targeted group:
- IV-A recipients: Those getting assistance from a state program under part A of Title IV of the Social Security Act for Temporary Assistance for Needy Families (TANF)
- Veterans: Veterans who have service-connected disabilities, have been unemployed for extended periods, or receive food stamps
- Ex-felons: Individuals convicted of a felony who are hired within one year of their release or conviction
- Designated community residents (DCR): Residents of Empowerment Zones (EZ) or Rural Renewal Counties (RRC)
- Vocational rehabilitation referrals: Individuals with physical or mental disabilities who have completed or are completing rehabilitative services
- Summer youth employee: Individuals who are 16 or 17, only perform work from May 1 to September 15, and are residents of an RRC
- Supplemental Nutrition Assistance Program (SNAP) recipients: Those who have received SNAP benefits in the past six months
- Supplemental Security Income (SSI) recipients: Individuals receiving SSI benefits
- Long-term Family Assistance recipients: Those getting support from an IV-A program for at least the last 18 months with no more than two years since the support ended.
- Long-term unemployed: Individuals unemployed for 27 weeks or more who have received unemployment compensation.
Additional considerations for eligibility
- You can only claim the WOTC for eligible employees who have worked at least 120 hours in their first year of employment.
- Businesses can’t claim the WOTC for rehired employees.
- For-profit employers who can’t take the full tax credit because of the tax liability limitation can carry back the unused credit for one year and then forward 20 years.
Good to know about the WOTC
“Tax-exempt employers are eligible for the tax credit if they hire a qualified veteran only. For these employers, the credit is applied to the employer portion of Social Security taxes paid.”
— Peggy James, Certified Public Accountant (CPA)
Next, let’s find out more about how businesses can get the ball rolling on the required steps to participate.
How does the WOTC certification process work?
You must hire eligible individuals certified by a state workforce agency (SWA).
Overview of the certification steps
To qualify for the WOTC, follow these steps:
- Find and connect qualified individuals. SWAs manage the WOTC certification process. They work closely with American Job Centers and other partner groups, such as vocational training agencies, city and county social service offices, and the Veterans Administration.
- Start the WOTC certification request process with your local job agency. To prove an individual belongs to a targeted group, you need to send IRS Form 8850 and either ETA Form 9061 or ETA Form 9062 to the job agency in your state within 28 days of the person starting their job.
- Receive a WOTC certification and claim the credit after year one of their employment. You will receive a certificate (ETA Form 9063) if the individual is eligible.
Required forms
You must submit these forms to claim the WOTC.
- IRS Form 8850: The employer and the applicant must complete this form to confirm that the applicant belongs to a targeted group. It must be submitted using one of two Department of Labor Forms: ETA Form 9061 or ETA Form 9062.
- ETA Form 9061: The Individual Characteristics Form (ICF) provides additional information validating the employee’s eligibility.
- ETA Form 9062: The Conditional Certification Form is a preliminary certification.
- IRS Form 5884: For-profit employers use this form to claim the WOTC.
- IRS Form 5884-C: Tax-exempt organizations use this to claim the WOTC.
Benefits of participating in WOTC
The WOTC helps employers and targeted groups who have difficulty getting a job.
Tax credits for employers
- If the individual works at least 400 hours, the employer can claim 40% of up to $6,000 in wages, which is $2,400.
- If the employee works 120 to 399 hours, the credit is limited to 25% of the wage. For certain veterans, the employer can claim up to $24,000 in wages, maximizing the credit at $9,600.
Job opportunities for employees
The WOTC gives job opportunities to people who need help getting hired. It mainly focuses on groups with greater barriers to employment.
Claiming the WOTC credit
After meeting all requirements, you must file the appropriate paperwork to claim the credit.
Timing and submission deadlines
Prospective employees must complete the questionnaire on the first page of Form 8850 on or before the job offer date to see if they qualify as one of the WOTC target groups.
Employers then have a deadline to send Form 8850 28 days after the eligible individual begins their job. This form must be sent to the designated local agency in the state where the employee works.
Process for filing claims
After the qualified individuals have been certified, you must follow these steps to claim the WOTC:
- Track the hours worked and wages paid: The credit is based on the employees’ hours and wages.
- Claim your tax credit: Fill out IRS Form 5884 (or Form 5884-C for tax-exempt employers) for annual tax filing.
Leveraging WOTC for business growth and social impact
Along with providing financial incentives for businesses, the WOTC also aims to address economic disparities and promote social progress by expanding job opportunities for individuals from targeted groups. Through this program, employers can make a positive impact not only on their bottom line but also make a positive impact on their communities.
If you are unsure what your obligations are when calculating payroll taxes or looking for more information on how tax credits can make a difference in your business? Take a closer look at OnPay’s award-winning payroll software or find out more about how our partnership can provide you with guidance on tax credits. Wishing you the best of luck in your business endeavors during the year ahead!
This article is for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors for formal consultation.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.