Do I Have to Fill Out the Work Opportunity Tax Credit?

The Work Opportunity Tax Credit (WOTC) is a federal tax incentive. This credit encourages businesses to hire individuals from specific targeted groups that often face significant barriers to employment. Employers can voluntarily apply for this credit to reduce their federal income tax liability. The WOTC serves as a financial encouragement, not a mandate, for companies to diversify their workforce.

Identifying Eligible Employees

Employers must identify new hires belonging to specific targeted groups. These groups include qualified veterans (unemployed or receiving certain benefits), individuals receiving Temporary Assistance for Needy Families (TANF) or Supplemental Nutrition Assistance Program (SNAP) benefits, and long-term unemployment recipients (unemployed for at least 27 consecutive weeks and receiving unemployment compensation).

Other eligible groups include vocational rehabilitation referrals, ex-felons, qualified summer youth employees aged 16 or 17 residing in an empowerment zone, individuals receiving Supplemental Security Income (SSI), and designated community residents living in specific low-income areas. Employers typically rely on employee self-attestation, often through IRS Form 8850, or documentation from a referring agency to confirm eligibility.

Preparing Your WOTC Application

To apply for the WOTC, employers must complete IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit.” This form requires new hire details, including name, address, and Social Security Number. The form also requires the employee’s targeted group.

The form includes questions to determine eligibility, such as prior employment history or receipt of certain government benefits, which the employee answers. Employers can obtain Form 8850 from the Internal Revenue Service (IRS) website. The form must be accurately completed and signed by both the employer and the employee. It must be submitted within 28 days from the employee’s start date.

Submitting Your WOTC Application

Employers must submit Form 8850 to the State Workforce Agency (SWA). Submission typically involves mailing the form to the designated SWA office. Employers should verify the correct mailing information, as each state has its own specific address and procedures.

The SWA reviews Form 8850 and any documentation to verify eligibility. If approved, the SWA issues a certification confirming the new hire qualifies for the WOTC. This certification is required to claim the credit on federal income tax. Once certified, employers use IRS Form 5884, “Work Opportunity Credit,” and then transfer the credit amount to IRS Form 3800, “General Business Credit,” to claim the tax benefit.

Determining Your Credit Amount

The Work Opportunity Tax Credit amount is generally calculated as 40% of the first $6,000 in qualified wages paid to an eligible employee during their first year of employment. This results in a maximum potential credit of $2,400 per certified employee. Qualified wages include taxable wages subject to Federal Unemployment Tax Act (FUTA) and certain other payments, but exclude amounts for which the employer is reimbursed.

A reduced credit rate applies if the employee works fewer than 400 hours but at least 120 hours; in this scenario, the credit is 25% of the qualified first-year wages, up to a maximum of $1,500. Higher maximum credit amounts are available for certain targeted groups to provide greater incentives for hiring these individuals. For example, employers hiring qualified long-term unemployment recipients can claim up to $9,600 over two years, based on 40% of the first $10,000 in qualified wages for each of the first two years. Similarly, hiring certain qualified veterans can also yield a maximum credit of $9,600, depending on factors like unemployment duration and disability status.