Employers Do Good, Get Income Tax Credits

Employers may receive a federal income tax credit for hiring and retaining workers from groups that have historically faced difficulty in finding employment. The Work Opportunity Tax Credit (WOTC) is a federal income tax credit designed to incentivize hiring employees from designated groups and help these individuals find steady employment. Employers should understand how to qualify for this credit and determine how it enhances their hiring plans.

About the Work Opportunity Tax Credit

WOTC provides an income tax credit based on a percentage of the first-year wages paid to individuals certified by designated local agency, i.e., state workforce agency, as being a member of one of 10 targeted groups. WOTC applies during the first year of employment; rehired employees are not eligible. There is no limit to the number of individuals that an employer can hire as part of the program. Individuals must begin work on or before December 31, 2025.

The amount of the tax credit varies based on the target group.  The maximum tax credit for most groups is $2,400 per employee, which is 40 percent of first year wages up to $6,000 of wages paid or incurred on behalf of individuals who are members of a targeted group and perform at least 400 hours of services.  The maximum tax credit for certain qualified veterans and certain Long-Term Family Assistance recipients is $9,600, which is 40 percent of first year wages up to $24,000 of wages paid or incurred on behalf of these individuals who perform at least 400 hours of services. Summer youth workers may be eligible for a credit up to $1,200 per employee.  A reduced rate of 25 percent instead of 40 percent is available for individuals performing fewer than 400 but at least 120 hours of service for the employer.

Employers claim the credit up to the amount of their business income tax liability or Social Security tax. Unused WOTC may be carried one year and carry forward for up to 20 years.

Targeted Groups

Employers may qualify for the WOTC by hiring an individual who is a member of one of 10 targeted groups (with certain exclusions). These are groups that have historically faced barriers to employment:

• Recipients of state assistance under part A of title IV of the Social Security Act (SSA);
• Qualified veterans;
• Qualified ex-felons;
• Residents in areas designated as empowerment zones or rural renewal counties;
• Individuals referred to an employer following completion of a rehabilitation plan or program;
• Qualified youth summer employees;
• Individuals whose families are recipients of Supplemental Nutrition Assistance Program (SNAP) Benefits;
• Recipients of supplemental security income benefits under title XVI of the SSA;
• Individuals whose families are a “long-term family assistance recipient” under part A of title IV of the SSA; and
• Individuals experiencing long-term unemployment.

Claiming the WOTC

An employer claims the WOTC by first certifying that the employee is a member of a target group. Prior to the day that the employer extends an offer of employment, the employer and the employee complete Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit).  Thereafter, the employer files the 8850 within 28 calendar days from the employee’s start date.

Once the designated local agency certifies that the employee is a member of one of the 10 target groups, taxable employers file Form 5884 (Work Opportunity Credit) and tax-exempt employers file Form 5884-C (Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans) to claim the WOTC.

Monitoring and Record Keeping

Employers must monitor the number of hours that certified employees work. The wages that are used to calculate the WOTC generally cannot be used to calculate other wage-based credits. Employers must keep accurate records of these hours, including retaining copies of all the forms and supporting documents submitted in claiming the credit, amongst other documents.

Weaver can help you determine eligibility for the WOTC, claim the credit, and assist with determining supporting documentation. Contact us for information.

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