What Is WOTC? | Work Opportunity Tax Credit

What Is the Work Opportunity Tax Credit (WOTC)?

There is constant talk about unemployment and its effects. Unemployment reports are published monthly. And, there are numerous articles about welfare benefits.

Here are some quick stats:

Did you know that you can receive a tax credit for employing people in these stats? The Work Opportunity Tax Credit (WOTC) could potentially help you out financially when you hire new employees. So, what is WOTC?

What is WOTC?

The Work Opportunity Tax Credit is tax credit available from the federal government. You might be able to receive the tax credit when you hire an employee from a “target group.” The target groups are listed in the next section.

You can think of WOTC as a financial incentive to employ people from target groups. The tax credit also gives you an opportunity to reduce the unemployment rate while diversifying your business.

What are the target groups?

Target groups are certain groups of people who face barriers when seeking employment. There are currently nine target groups:

  1. Veterans
  2. TANF Recipients
  3. SNAP Recipients
  4. Designated Community Residents living in Empowerment Zones or Renewal Communities
  5. Vocational Rehabilitation Referrals
  6. Ex-felons
  7. Supplemental Security Income (SSI) Recipients
  8. Summer Youth Employees living in Empowerment Zones
  9. Qualified Long-Term Unemployment Recipients

To learn about the target groups, visit the U.S. Department of Labor website.

Even if an employee falls into one of the eight target groups, they still might not qualify you for the WOTC. The following employees will not qualify you for the WOTC:

  • relatives and dependents
  • former employees (except for summer youth)
  • majority owners of the business

What are Empowerment Zones and Renewal Communities?

Empowerment Zones and Renewal Communities are urban and rural areas that have high unemployment rates. You can receive tax credits when you hire employees who live in Empowerment Zones.

To find out if your employees live in an Empowerment Zone or Renewal Community, you can use the U.S. Department of Housing and Urban Development Empowerment Zone and Renewal Counties Locator. With this tool, you can search by state or address to make sure you are accurate.

What is the PATH Act?

On Dec. 18, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act).

The PATH Act:

  • authorizes the target groups until Dec. 31, 2019
  • extends the Empowerment Zones until Dec. 31, 2016
  • adds the target group for Qualified Long-term Unemployment Recipients

How much of a tax credit can I get?

For most target groups, you can receive the following tax credit:

  • For employees who work at least 120 hours in a year, 25% of the employee’s first-year wages, up to the maximum credit
  • For employees who work at least 400 hours in a year, 40% of the employee’s first-year wages, up to the maximum credit

The tax credit is different for Qualified Long-term TANF Recipients:

  • For the first year, 40% of the first-year wages, up to the maximum credit, for employees who work at least 400 hours in a year.
  • For the second year, 50% of the second-year wages, up to the maximum credit, for employees who work at least 400 hours, in a year.

The maximum credit you can get ranges from $1,200 to $9,600, depending on the employee.

You can use the Work Opportunity Tax Credit Calculator to project the total tax credit that you might be able to receive.

How do I apply for the WOTC?

There are several forms that you will need to fill out.

On the day you offer the job, fill out only page 1 of IRS Form 8850. After the employee is hired, fill out page 2 of the form.

State workforce agencies, vocational rehabilitation agencies, and some other agencies can conditionally certify the employee as belonging to a target group. If this happens, complete ETA Form 9061 or ETA Form 9062.

Once you fill out the forms, submit them to your state workforce agency within 28 days of the employee’s start date.

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