The Work Opportunity Tax Credit (WOTC)allows employers who are willing to help disadvantaged individuals to benefit from a substantial federal tax credit.
The WOTC is typically worth up to $2,400 for each eligible employee, but it can be worth up to $9,600 for certain veterans and up to $9,000 for “long-term family assistance recipients.” The credit is available for eligible employees who begin working for the new employer before December 31, 2025.
Generally, an employer is eligible for the WOTC only when paying qualified wages to members of any of the targeted groups listed below. For more details on the required qualifications for each group, see the instructions for IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit).
The formerly incarcerated or those previously convicted of a felony;
Recipients of state assistance under part A of title IV of the Social Security Act (SSA);
Residents in areas designated as empowerment zones or rural renewal counties;
Individuals referred to an employer following completion of a rehabilitation plan or program;
Individuals whose families are recipients of supplemental nutrition assistance (SNAP) under the Food and Nutrition Act of 2008;
Recipients of supplemental security income benefits under title XVI of the SSA;
Summer youth employees;
Individuals whose families are recipients of state assistance under part A of title IV of the SSA; and
Individuals experiencing long-term unemployment.
For an employer to qualify for the credit, the employee must work a minimum of 120 hours and receive at least 50% of his or her wages from that employer for working in the employer’s trade or business. Relatives of the employer and employees who have previously worked for the employer do not qualify for the credit.
For an employee from most of the targeted groups, the credit is based upon the first $6,000 of first-year wages. If an employee completes at least 120 hours but less than 400 hours of service for the employer, the credit is equal to those wages multiplied by 25%. If the employee completes 400 or more hours of service, the credit is equal to the wages multiplied by 40%. Thus, the maximum credit per employee in one of these groups would be $2,400 (.4 x $6,000). For the summer youth employees, only the first $3,000 of the first-year wages are taken into account, resulting in a maximum per-employee credit of $1,200 (.4 x $3,000)
Two categories allow for higher first-year wages to be eligible when calculating the credit:
Long-term family assistance recipients – For this category, the first-year wage eligible for the credit is increased to $10,000, thus allowing a maximum credit of $4,000 (.4 x $10,000). In addition, this group qualifies for a credit in the second year (immediately following the first year); this is equal to 50% of second-year wages up to $10,000.
Veterans – The three possible qualifications of veterans have applicable first-year wages for the credit of up to $12,000, up to $14,000 and up to $24,000. Thus, the maximum credit for this group is between $4,800 (.4 x $12,000) and $9,600 (.4 x $24,000), depending upon the qualification.
Certification Process - To be eligible to claim the WOTC, the employer must file Form 8850 with its state workforce agency (SWA) no later than 28 days after an eligible employee begins work. Once the worker is state-certified as a member of a targeted group and has worked sufficient hours, the employer can claim the WOTC on Form 5884 (Work Opportunity Credit).
No Dual Benefits – No deduction is allowed for the portion of wages equal to the WOTC for that tax year.
Unused Current-Year Credit– The credit is included in the general business credit, and if an employer’s credit is greater than its income-tax liability (including the alternative minimum tax), the excess credit is considered an unused credit that is available for use on another year’s return. The unused credit is first carried back one year (generally by amending the return for the carryback year) and then carried forward until any remaining credit is used up (but for no more than 20 years).
Tax Exempt Employer– A tax-exempt employer would file Form 5884-C , Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, to claim the WOTC. Since tax-exempt employers don't pay income tax, the WOTC can be applied to the employer's Social Security tax liability.
For tax-exempt employers, the WOTC is limited to the amount of employer Social Security tax owed on the total taxable Social Security wages and tips for the employment tax period for which the credit is claimed.
In some circumstances, electing not to claim the credit is more valuable tax-wise for the employer. Please call this office for additional information related to the WOTC and to see if it would be beneficial in your particular tax circumstances.
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