What is the WOTC?
The Work Opportunity Tax Credit (WOTC) is a federal tax credit open to employers who hire and retain individuals from target groups whose members face significant barriers to employment. Employers can claim credits of up to $9,600 per eligible employee, depending on the employee’s background, salary, and hours worked. The credit was expanded through the end of 2020 last December; according to the Department of Labor, employers claim around $1 billion under the WOTC every year.
Navigating the WOTC can seem complicated — target group definitions are fairly specific, and paperwork and deadlines appear daunting. In reality, it’s fairly simple: once an employee is determined eligible, employers only need to fill out a few simple application forms and send them to their state WOTC coordinator, then claim credits based on the employee’s salary and hours worked at the end of the fiscal year. The credit is equivalent to 25% of the employee’s first-year wages when they work at least 120 hours, and up to 40% of those wages when they work over 400 hours (up to their target group’s cap). The Equal Employment Opportunity Commission has noted that employers may in fact inquire into WOTC target group status in the interest of WOTC affirmative action.
How do you Apply?
Applying to the WOTC generally involves only a few steps. First, the employer and eligible employee must fill out IRS Form-8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit) to certify the employee as member of target group(s). Next, they must complete ETA Form-9061 (Individual Characteristics Form) detailing more specific information and sometimes requiring further documentation/identification. For those without unemployment insurance records, ETA Form 9175 (Long-Term Unemployment Recipient Self-Attestation Form) must be completed. Finally, the employer must submit these forms to the state workforce agency or WOTC coordinator for approval within 28 days after the employee’s hiring date — any submission after 28 days is invalidated. The state will confirm/deny the application or ask for further information if needed. Following all this, employers file for the credit using IRS Form-5884 (Work Opportunity Credit) at the end of the fiscal year (unless they are a tax-exempt group hiring veterans, in which case they will complete IRS Form- 5884-C,).
Who all is Eligible?
According to the IRS, the following groups are eligible for the WOTC:
A “qualified ex-felon” is a person hired within a year of:
- Being convicted of a felony or
- Being released from prison from the felony
A qualified long-term unemployment recipient is one who has been unemployed for not less than 27 consecutive weeks at the time of hiring and received unemployment compensation during some or all or the unemployment period.
An individual who is a member of a family receiving assistance under a state plan approved under part A of title IV of the Social Security Act relating to Temporary Assistance for Needy Families (TANF). The assistance must be received for any 9-month period during the 18-month period ending on the hiring date.
A “qualified veteran” is a veteran who is any of the following:
- A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least 3 months during the first 15 months of employment.
- Unemployed for a period totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period ending on the hiring date.
- Unemployed for a period totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date.
- A disabled veteran entitled to compensation for a service-connected disability hired not more than one year after being discharged or released from active duty in the U.S. Armed Forces.
- A disabled veteran entitled to compensation for a service-connected disability who is unemployed for a period totaling at least six months (whether or not consecutive) in the one-year period ending on the hiring date.
[See IRS Notice 2012-13 (PDF) for more details]
A DCR is an individual who, on the date of hiring
- Is at least 18 years old and under 40,
- Resides within one of the following:
- An Empowerment zone
- An Enterprise community
- A Renewal community
- AND continues to reside at the locations after employment.
A “vocational rehabilitation referral” is a person who has a physical or mental disability and has been referred to the employer while receiving or upon completion of rehabilitative services pursuant to:
- A state plan approved under the Rehabilitation Act of 1973 OR
- An Employment Network Plan under the Ticket to Work program, OR
- A program carried out under the Department of Veteran Affairs.
A “qualified summer youth employee” is one who:
- Is at least 16 years old, but under 18 on the date of hire or on May 1, whichever is later, AND
- Is only employed between May 1 and September 15 (was not employed prior to May 1st) AND
- Resides in an Empowerment Zone (EZ), enterprise community or renewal community.
A “qualified SNAP benefits recipient” is an individual who on the date of hire is:
- At least 18 years old and under 40, AND
- A member of a family that received SNAP benefits for:
- the previous 6 months OR
- at least 3 of the previous 5 months.
An individual is a “qualified SSI recipient” if a month for which this person received SSI benefits is within 60 days of the date this person is hired.
A “long term family recipient” is an individual who at the time of hiring is a member of a family that meet one of the following conditions:
- Received assistance under an IV-A program for a minimum of the prior 18 consecutive months; OR
- Received assistance for 18 months beginning after 8/5/1997 and it has not been more than 2 years since the end of the earliest of such 18-month period; OR
- Ceased to be eligible for such assistance because a Federal or State law limited the maximum time those payments could be made, and it has been not more than 2 years since the cessation.