What's Up With the Work Opportunity Tax Credit?

The Work Opportunity Tax Credit (WOTC) is a federal tax credit. In short, it encourages employers to hire workers who are certified members of groups of people who face significant barriers to employment.

If you wish to benefit from the WOTC, you will first need to apply for the tax credit. From there, you must receive a certification that verifies the status of your new hires as members of a targeted group of people prior to said hires beginning their jobs with your company.

Which groups of people face barriers to employment the most?
Historically, certain groups of people have encountered notable difficulties when applying for employment and receiving job offers.

Here are examples of those who face such barriers to employment:

• Military veterans.
• Recipients of food stamps.
• Convicted felons.
• Vocational rehabilitation referrals.
• Youth.

To combat this issue, the WOTC program aims to promote the hiring of individuals from these specific target groups.

In addition to increasing the employment opportunities for people who have faced barriers to employment, the WOTC also seeks to reduce the number of people who face total reliance on government assistance programs, allowing them instead to be independent and more self-sufficient.

What happens once you are certified for the WOTC?
Upon obtaining the certification, you are eligible to apply the WOTC as a general business credit toward your income taxes. Tax-exempt employers can utilize the WOTC by offsetting it against their payroll taxes.

The maximum credit amount varies based on factors such as the number of hours worked by the employee in the initial year of employment. For long-term Temporary Assistance for Needy Families (TANF) recipients, the calculation also considers wages paid to the employee and the specific categorization of the employee's target group.

Understanding the numbers behind the WOTC
According to the Department of Labor, you have the potential to receive a tax credit ranging from 25% to 40% of the new hire's applicable wages, capped at a maximum of $9,600. To secure certification, submit Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to your state workforce agency within 28 days of the employee's first day of work.

You claim the WOTC through your federal income tax return. The credit is determined based on the wages paid to eligible workers in their inaugural year of employment. After obtaining the Form 8850 certification, you can calculate your credit and apply for it using Form 3800, the General Business Credit.

Rules for tax-exempt organizations
A specific provision permits tax-exempt organizations to use the credit exclusively for employing eligible veterans who commenced their employment with the organization before 2026. Following the acquisition of Form 8850 certification, the credit can be asserted against payroll taxes using Form 5884-C, the Work Opportunity Credit for Qualified Tax-Exempt Organizations.

Rules for taxable businesses
In the case of taxable businesses, the credit value is restricted to a company's income tax liability. Conversely, for tax-exempt entities, the credit is capped at the employer Social Security tax amount applicable to wages paid to qualifying employees.

The WOTC program can prove to be either a financial advantage or an administrative challenge. The extent to which the credit serves as a benefit rather than a cost depends on how effectively your company can implement processes to administer the WOTC program in a manner that proves beneficial for you.

How to make the WOTC work for you
Effective utilization of the WOTC involves the following steps:

• Screen the applicant to determine WOTC eligibility and gather all necessary information for form completion.
• Ensure that the screening process is user-friendly for applicants, using clear language and skipping irrelevant sections.
• Seek screening solutions that are compatible across various platforms, including mobile devices.
• Consider integrating with an applicant tracking system to enhance screening compliance rates.

As an employer, you must prioritize documentation and administration to maximize the perks you receive from this tax credit. Make sure you monitor the number of hours worked and the qualified wages that are paid to WOTC-certified employees. Note that qualifying employees must log a total of at least 120 hours during their first year of employment for you to remain eligible for the credit.

Maintain copies of all forms and supporting documents that are submitted by eligible workers. You never know when you could be audited by the IRS, so it’s in your best interest to simply anticipate a potential audit at any time. But with plenty of proof backing your claims, you’ll be able to verify your credit eligibility with ease.
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Always adhere to the criteria of WOTC certification to optimize the program's impact on your business finances. R1emember that the WOTC is authorized until Dec. 31, 2025.

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