The federal Work Opportunity Tax Credit (WOTC) could be a boost to your bottom line – a one-time credit up to $9,600 per qualified new hire.
To be eligible for a WOTC, employers need to hire workers that qualify as belonging to a group of people that face significant barriers to employment, such as:
- unemployed veterans or veterans with a service-related disability
- qualified individuals experiencing long-term unemployment
- vocational rehabilitation plan referrals
- Temporary Assistance for Needy Families recipients
- formerly incarcerated individuals or those previously convicted of a felony
- Supplemental Nutrition Assistance Program recipients
- Supplemental Security Income program recipients
- qualified long-term family assistance recipients
- designated community residents living in Empowerment Zones or Rural Renewal Counties. (Some Empowerment Zone designations have expired. However, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 provides for an extension of the designations to the end of 2025. State and local governments are responsible for filing these extensions.), and
- youth (at least age 16, but not yet 18) summer workers (between May 1 and September 15) that live in an Empowerment Zone.
The tax credit amount is 40% of the employee’s qualified wages if the employee works at least 400 hours during the first year of employment. If the employee works less than 400 hours, but at least 120 hours, the credit is 25% of the employee’s qualified wages. However, employers can’t claim the credit for employees that are rehired.
What’s new with WOTC
To qualify, your company and the job applicant must complete IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, and file it with the state workforce agency of the state where the employee works (but not with IRS). It’s then up to the state WOTC coordinator whether the new hire qualifies.
What’s changed is the pre-screening must be completed on or before the day a job offer is made. Both the job applicant and the employer must sign Form 8850 no later than the date you submit the form to the state workforce agency.
The updated guidance is a sign IRS is watching for employers that may be screening applicants out of compliance, that the Service may audit WOTC claims and enforce compliance with costly penalties.
Compliance keys
If you decide to take advantage of WOTC:
- you’re allowed to recruit WOTC-eligible candidates by contacting your state workforce agency or local unemployment office for a list of potential job applicants
- ensure that applicants complete the questionnaire on the first page of Form 8850 on or before the job offer date
- submit the completed Form 8850, and either ETA Form 9061, 9062 or 9175, to your state workforce agency within 28 calendar days of the eligible new hire’s start date
- ensure that at least 120 hours are worked by a qualified employee during the first year of employment and that qualified wages are paid. Correctly tracking work hours will be crucial if IRS audits your claimed tax credits. Note that employees that are long-term TANF recipients must work a minimum of 400 hours.
- claim the tax credit using IRS Form 5884 when filing your annual tax returns, and
- keep copies of all forms and supporting documents submitted to your state workforce agency.
