By using the Work Opportunity Tax Credit (WOTC), employers can save money on their income or payroll taxes. To qualify, you just have to give employees a short questionnaire. Then, the employee must get WOTC-certified by your State Workforce Agency (SWA). 

Through the WOTC, you can get up to $9,600 per worker. It starts to kick in as soon as the employee works at least 120 hours. For more information on how this credit works, read on.

What Is the WOTC?

The WOTC is intended for workers who have traditionally faced barriers to getting employment. To help them find jobs, the government has implemented tax credits for workers who fit into certain target groups. 

As a general rule, you can only give the WOTC to someone who is in the first year of their employment and a member of a targeted group. They must also perform at least 400 hours of service for your company. If the worker only performs between 120 to 400 hours of service, the 40% rate drops to just 25%.

You can use the WOTC to reduce your income tax liability. If you don’t pay income tax, you can use it for your payroll tax liability. However, the WOTC limits targeted groups to just veterans if you’re using it for payroll taxes.

What Are WOTC Target Groups? 

Only certain workers are eligible for the WOTC. Additionally, the amount of the WOTC is determined by which target group the worker is a part of. While veterans can get credits worth up to $9,600, other groups may qualify for just a 40% credit on $6,000 in wages. On the low side, this means some groups only get a maximum credit of $2,400. Among youth workers, the credit is only worth a maximum of $1,200.

There are 10 targeted groups that qualify for the WOTC. 

Qualified IV-A Recipient: This is someone who is part of a family that receives state aid from a program that falls under title IV of the Social Security Act. For example, Temporary Assistance for Needy Families (TANF) is one of these programs. 

Veterans: Veterans are a major WOTC target group. 

Youth Summer Employee: To qualify, the youth must be under 18 and only work between May 1 to September 1. Additionally, they must live in an Empowerment Zone (EZ). 

Ex-Felons: Once the felon has been released from prison, they can qualify for the WOTC.

Vocational Rehabilitation Referral: This program is for mentally or physically disabled individuals who have been referred by the Ticket to Work program, a state plan, or a program from the Department of Veteran Affairs.

Long-Term Family Assistance Recipient: This group includes people who have received IV-A program assistance for at least 18 months. Additionally, the individual can qualify if they reached the time limit on IV-A program assistance within the last two years.

Designated Community Resident (DCR): A DRC is someone who is between the ages of 19 and 40 and lives in an EZ or a Rural Renewal County (RRC).

Recipient of the Supplemental Nutrition Assistance Program (SNAP): To qualify, the individual must be between 18 and 40 years old. They must be a member of a family that received SNAP for either the last six months or at least three of the last five months.

Recipient of Long-Term Unemployment: Long-term unemployment is defined as someone who has been unemployed for at least 27 weeks before the hiring date and who has received unemployment for at least a part of that time period. 

Recipient of Social Security Income (SSI): This refers to anyone who has received SSI at any point during the 60 days prior to the hiring date.

How Do You Calculate WOTC?

The way you calculate the WOTC can vary based on how many hours the employee worked for you. Employers rarely hire someone on January 1, so most employees only work for part of the initial year. Because of this, your calculations can vary. 

  • If a non-veteran employee works between 120 to 400 hours, the WOTC is worth 25% of their wages for up to $6,000 in wages. 
  • When a non-veteran employee works 400 or more hours, the WOTC is valued at 40% of up to $6,000 in wages. 

Veteran workers have unique calculations. Depending on the veteran group, they can get a tax credit based on up to $24,000 in wages. In these instances, the employer can receive up to $9,600 through the WOTC. 

Additionally, employees who are classified as workers who receive long-term family assistance get the WOTC for their second year of employment as well. There are also specific credit limits in place for different types of employees. 

  • $1,200 maximum credit for summer youth
  • $2,400 maximum credit for adults who qualify for WOTC
  • $4,800 maximum credit when you hire a disabled vet
  • $5,600 for veterans who have been unemployed for at least six months
  • $9,600 for veterans who are disabled and classified as long-term unemployed

What Do Employers Need to Do to Get the WOTC?

To get the WOTC, employers must hire someone who is eligible for this credit. Before the first day of work, the employer or employee must fill out Form 8850. The questionnaire on the front page will determine whether the worker is eligible for the WOTC or not. 

Then, Form 9061 is used with Form 8850 to help the SWA determine if the employee is eligible for WOTC. Some workers may be pre-qualified for WOTC. If so, the employer will be able to turn in Form 9062 to the SWA.

After all this is complete, employers use Form 5884 to file for the WOTC when they turn in their annual tax return. Because the SWA certifies whether employees are eligible, there tend to be very few issues with getting the WOTC after you submit your return.

Are WOTC Credits Refundable?

The WOTC is non-refundable. This means you won’t be given a refund for the credit, and it can only be used against your tax liability. 

However, the WOTC does have carryback and carryforward provisions. You can carry the credit back up to one year, and the carryforward provision allows you to use it for up to 20 years after you qualify for it.

Find Out More Information About Using WOTC With Small Businesses 

Through the WOTC, you can reduce the amount of money you spend on labor costs, help your local community, and boost your bottom line. Even if you don’t need the credit today, it has carryforward provisions that let you use it for up to 20 years in the future. 

If you want to learn more or get help with the administrative side of the WOTC, reach out to our small business payroll and HR experts today. 

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