Work Opportunity Tax Credit (WOTC)

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Work Opportunity Tax Credit (WOTC)

What Is the Work Opportunity Tax Credit (WOTC)?

The work opportunity tax credit (WOTC) is a federal tax credit offered to firms that hire people from certain demographics. People who have experienced severe impediments to work are included. This tax credit is intended to promote workplace diversity while also making employment more accessible to particular groups of the workforce. 1

Key Takeaways

  • The work opportunity tax credit (WOTC) is provided to qualifying companies that recruit from certain target groups.
  • To receive the tax credit, employers must complete pre-screening and certification criteria.
  • After employing an employee, pre-screening and certification documentation must be submitted to the relevant state workforce agency within a certain time frame.
  • The WOTC will expire on December 31, 2020.

Understanding the Work Opportunity Tax Credit (WOTC)

The Department of Labor (DOL) and the United States Treasury jointly administer the work opportunity tax credit (WOTC) via the Internal Revenue Service (IRS).The Department of Labor provides grant funds and policy direction to state agencies that administer the certification process, while the IRS manages tax-related criteria for claiming the credit. 2

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) permits eligible businesses to claim the WOTC retroactively for qualified workers employed between December 31, 2014, and December 31, 2020, who are members of specified categories. The credit is available to businesses depending on the kind of people they recruit, the salary they pay in their first year of employment, and the amount of hours they work. 1

Types of Workers Who Are Eligible for the Work Opportunity Tax Credit (WOTC)

Employers may only claim the job opportunity tax credit if they employ from certain target groups. Targeted groups, according to IRS standards, include:1

  • Individuals receiving temporary assistance for needy families (TANF) payments under Title IV, Part A of the Social Security Act
  • Qualified veterans, including those receiving SNAP benefits, those who are jobless, and those who are unemployed but are entitled to compensation for a service-connected disability
  • Qualified ex-felons
  • Residents of designated communities who are at least 18 years old and under 40 years old who live in an empowerment zone, enterprise community, or renewal community
  • Individuals with physical or mental impairments who have been recommended to employment after the completion of rehabilitation treatment
  • Summer youth employees
  • Recipients of the Supplemental Nutrition Assistance Program (SNAP)
  • Recipients of Supplemental Security Income (SSI)
  • Recipients of long-term family aid
  • Long-term unemployed who meet certain criteria
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Required Certification Forms for the Work Opportunity Tax Credit (WOTC)

To claim the employment opportunity tax credit, employers must confirm that a prospective employee is a member of a targeted group. This entails completing many forms containing information from both the employee and the company.

IRS Form 8850

Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, is one form that must be completed.

Form 8850, Page 1, must be completed by the employee, who must supply the following information:

  • Name
  • Address
  • Social Security number
  • Age
  • Status of certification (i.e., which targeted group they belong to)

Form 8850, Page 2, requires the employer to provide:

  • Their contact information
  • The date on which the person was hired
  • The employee’s start date
  • The employee’s first day of work

Before the employer files Form 8850 with the employer’s state workforce agency, both the employee and the employer must sign it. This must be done within 28 days of the employee for whom they are claiming credit starting employment. 1 3 4

DOL Form 9061

A second form, this time for the Department of Labor, must be completed. The employee completes DOL Form 9061, and the employer must verify the accuracy of the information using supporting papers. Depending on the targeted population, such documents may include a copy of the employee’s birth certificate, military discharge papers, or records of receiving SNAP or SSI assistance. 5

To be eligible for the credit, both IRS Form 8850 and DOL Form 9061 or DOL Form 9062 must be submitted with the employer’s state workforce agency rather than the IRS.

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If an employee has previously been conditionally certified, which means they have been provisionally recognized as being part of a target group, the employer may use DOL Form 9062 instead. The employer’s state workforce agency makes conditional certification decisions, and Form 9062 serves as an official record of pre-certification. When submitting Form 8850, the employer must also submit Form 9061 or 9062.

Advantages and Disadvantages of the Work Opportunity Tax Credit (WOTC)

Tax credits may assist companies in reducing their tax bill, which can boost the bottom line. This is true for the work opportunity tax credit, as well as any other sort of company tax credit.

Another benefit of the credit is that it promotes more diversity in employment. From the standpoint of a worker, this tax credit may make it easier for some groups who have hitherto been neglected in the recruiting process to obtain job.

The IRS permits the employer to use the credit against the employer’s business income tax due for the year, subject to the regular carry-forward and carry-back requirements. 1

On the other hand, satisfying certification and filing requirements may be the most difficult hurdle for companies. While the paperwork is simple, companies must verify that they are completing documents accurately and on time in order to pre-screen and certify personnel. They must also maintain proper records of their workers’ hours and pay earned throughout their first year of employment in order to claim the credit.

Claiming the Work Opportunity Tax Credit (WOTC)

Employers may claim the employment opportunity tax credit on their income tax returns after an employee has been certified. This must be filed:

  • Work Opportunity Credit (IRS Form 5884)
  • Form 3800, General Business Credit, IRS
  • IRS Forms 1040, 1040-SR, 1041, 1120, and so forth.
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Employers must establish the number of hours worked by the employee and their salary for the first year of employment in order to compute the credit. The credit that an employer may claim is restricted to the amount of business income tax or Social Security tax that is owing. 1

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