Work Opportunity Tax Credit (WOTC): How to claim & where to file

Summary:

• WOTC is a federal tax credit available to organizations that hire marginalized job seekers, like disabled veterans or ex-felons, who traditionally have a difficult time finding employment. 
  
• Employers typically receive a maximum tax credit equal to 40% of up to $6,000 of wages paid to a qualified WOTC employee in their first year of employment. WOTC cannot be claimed beyond that first year.
  
• To claim WOTC, employers must fill out additional IRS and DOL forms and submit them to their State Workforce Agency

• Many Payroll & HR Software providers handle WOTC screening and certification requests for employers, making the process of claiming tax credits much easier. 

The Work Opportunity Tax Credit (WOTC) is a federal tax credit that incentivizes employers to hire people who typically face significant barriers to employment. This program typically offers employers between $2,400 – $9,600 per new qualifying hire. According to the U.S. Department of Labor, roughly $1 billion in tax credits are handed out yearly through WOTC. 

To receive the credit, taxable organizations must complete a screening and certification process when hiring potentially eligible staff. If approved, employers then file an additional form with their annual business tax return. Non-taxable organizations can also participate in the program by receiving a credit against their payroll taxes. 

Introduced in 1996 as part of the Small Business Protection Act, the program was recently extended through Dec 31, 2025, largely due to the impact COVID-19 has had on the labor market. Currently, there is a bipartisan push in Congress to make WOTC permanent.

Benefits of the Work Opportunity Tax Credit

The intended goal of WOTC is to benefit both employers and employees alike. Incentivizing the hiring of targeted individuals through tax credits not only reduces costs for employers by decreasing their federal income tax liability, but it also makes it much easier for these individuals to get hired. WOTC also benefits non-taxable employers by allowing them to receive a credit against their share of Social Security taxes.

While the financial boon to employers is obviously a nice benefit, the main purpose of WOTC is really to help individuals who typically have a difficult time finding a job get hired. Over the years, WOTC has helped people like disabled veterans and ex-felons find jobs, re-enter the workforce, and get a fresh start. Not only is WOTC supposed to help these people get hired, but the program also encourages job retention by requiring WOTC-certified new hires to work a minimum of 120 hours before employers can receive the minimum credit. 

Who is eligible? 

The IRS specifies nine “target groups” employers can hire from to receive tax credits. These groups are:

• Qualified veterans
• Ex-felons
• Designated community residents in Empowerment Zones or Rural Renewal Counties
• Vocational rehabilitation referrals
• Summer youth employees living in Empowerment Zones
• Supplemental Nutrition Assistance Program (SNAP) recipients
• Supplemental Security Income (SSI) recipients
• Temporary Assistance for Needy Families (TANF) recipients
• Long-term unemployment recipients designated by a local agency who have been unemployed for at least 27 consecutive weeks

For the most part, employers can only claim tax credits during the first year a person from one of these target groups is employed. The only exception is for TANF recipients, who employers may claim credit during the first two years.

How to claim in 5 steps

The process for claiming the Work Opportunity Tax Credit upon hiring a qulaiifed individual is relatively straightforward, but it does involve multiple steps and additional tax forms. For more information, visit the IRS website. But for now, here is the general timeline:

1. Screen Applicants: you’ll want to ensure every new hire is screened for WOTC eligibility. Do this by ensuring applicants complete the IRS Form 8850 Pre-Screening Notice on or before the job offer date. You’ll submit this form and a written request to your State Workforce Agency (SWA) to see if an applicant qualifies for the tax credit. Visit the DOL website for a complete list of links to State Workforce Agencies. 
2. Complete DOL ETA Form 9061 or 9062: The WOTC Individual Characteristics Form should be completed by the new hire as part of their onboarding. Along with this form, the new hire will typically need to provide supporting documentation or forms certifying their status as a member of a targeted group. 
3. File Documents: Submit Form 8850 and 9061 along with all supporting documentation to your SWA within 28 days of the new hire’s start date. The SWA decides the eligibility of your new hire and can sometimes request additional information before approving your certification request.
4. Track hours and wages: To claim the minimum tax credit, qualified new hires must work at least 120 hours in their first year of employment. Depending on how many qualified staff an employer has, accurately tracking all of this information can be tedious. To make things easier, use a Time and Attendance system to automatically record hours and wages on electronic timesheets. 
5. Claim the tax credit: To receive the tax credits, submit IRS Form 5884 when filing your annual tax returns at the end of the year. Tax-exempt organizations will need to submit Form 5884-C. 

If an employer uses an outside consultant, such as a payroll or CPA firm, to sign and file WOTC forms on their behalf, they will also need to complete the Employer Representative Declaration form 9198. This form essentially declares a third party as a legal representative to manage WOTC certification requests.

How is it calculated?

At the end of the year, employers receive a maximum tax credit equal to 40% of up to $6,000 of wages paid to a qualified WOTC employee in their first year of employment. The employee needs to work at least 400 hours for the employer to receive the credit.

If the maximum tax credit above is met, employers typically receive $2,400 in credit per WOTC employee. However, employers may also claim credit on 25% of the first-year wages earned by a qualifying employee who works at least 120 hours.

There are several exceptions to the maximum credit amount of $2,400. Here are the WOTC target groups with different maximum credit amounts:

• Veterans with service-connected disabilities who have been employed for more than six months – $9,600
• Long-Term Family Assistance recipients who have received TANF benefits for at least 18 consecutive months – $9,000
• Summer Youth program participants ages 16 and 17 and live in a designated community area – $1,200

Is WOTC truly a win-win?

The Work Opportunity Tax Credit program has obvious benefits for both employers and individuals in target groups. Over the years, the tax credit incentive has not only saved organizations thousands of dollars every year but also helped marginalized people across the country re-enter the workforce and provide for themselves.

However, there are some question marks regarding the effectiveness of the WOTC program. 

One of the proposed benefits of WOTC is to encourage retention. Unfortunately, meeting the minimum 120 hours for tax credit only equates to roughly three weeks of full-time employment. This low threshold has led to temporary employment agencies taking full advantage of WOTC, hiring cheap labor, getting a tax credit, and then quickly moving on from these workers.

But temp agencies aren’t the only problem. Large, low-wage employers with high turnover also take advantage of WOTC. Investigative journalism outlet ProPublica discovered that Walmart, Dollar General, and Amazon were some of the top recipients of the tax credit in a 2022 analysis. While these large companies are raking in the financial benefits, workers from target groups tend to fall by the wayside, working low-wage, high-stress jobs for a few weeks before getting laid off and starting the whole process over again.

This begs the question: With the government losing out on over $1 billion due to WOTC and temp agencies sometimes earning $114 million over the past ten years in credit, who is truly benefitting here? Without WOTC, what could the government spend its money on instead to help marginalized Americans? 

The outlook for WOTC is still uncertain. As of now, it is set to end after 2025. But, if it is either renewed or made permanent, perhaps a reassessment of who benefits from this program the most is in order. 

In the meantime, smaller employers would do well to make the most of this tax credit while also taking genuine steps to retain WOTC-qualified new hires for the long term. In most situations, WOTC is a win-win for employers and job seekers, and the program’s effect is most likely a net positive for the job market, even with a few bad actors tainting the program.

Claiming WOTC through Workforce.com

Properly screening new applicants for WOTC can be time-consuming and overburden your HR team. Not only does it prolong the hiring process, but it also opens the door to all kinds of mistakes if either a new hire or HR team member fills out a WOTC application form incorrectly.

If your organization wants to qualify for tax credits but doesn’t want to deal with the hassle, find a payroll system that does all of the work for you. 

Workforce.com features an easy-to-use WOTC screening service that allows new job applicants to check a few boxes to determine their eligibility. Using this information, Workforce.com fills out both forms 9061 and 8850 for you and sends them to your SWA for approval. Once approved, you can track all wages and hours worked through Workforce.com’s Time & Attendance system. At the end of each pay cycle, these hours are automatically reported for your organization so that you’ll receive the tax credit at the end of the year.

To learn more about claiming WOTC through Workforce.com, please reach out. We’d be happy to talk!