Tax Tips: Work Opportunity Tax Credit

The work opportunity tax credit (WOTC) is a tax credit available for employers only for hiring eligible target groups that face difficulty finding employment.

Target groups that qualify employers for the WOTC are:

• Qualified IV-A recipient
• Qualified veteran
• Ex-felon
• Designated community resident (DCR)
• Vocational rehabilitation referral
• Summer youth employee
• Supplemental nutritional assistance program (SNAP) recipient
• Supplemental security income (SSI) recipient
• Long-term family assistance recipient
• Qualified long-term unemployment recipient

The work opportunity tax credit is available up to the end of 2025 and applies to the first year for qualified veterans is limited to $6,000, $12,000, $14,000 and $24,000 of wages paid depending on the employee or incurred, for an employee that is:

• In their first year of employment
• Is a certified member of an eligible group (shown above)
• Works at least 400 hours of service for the employer.

• The amount of qualified first-year wages that may be taken into account for any employee certified as a summer youth employee is limited to $3,000. The amount of qualified first-year wages that may be taken into account for an employee certified as a member of any other targeted group is $6,000.

For each new hire this is a one-time credit, and an employer cannot reclaim the credit for any employee rehired. Employees who have not reached the 400 hours of service mark but are between 120 and 399 hours, a 25% rate applies to the wages of those employees.

This tax credit applies to almost all employers that hire disadvantaged target groups that face major obstacles to employment.

Businesses of any size can qualify for work opportunity tax credit.

Both taxable and certain tax-exempt employers located in the United States and some U.S. territories can claim this credit.

• If an employer is taxable, they can claim the credit against income taxes.
• If a tax-exempt employer is eligible, they can claim the credit only against payroll taxes and only for wages paid to members of the qualified veteran targeted group.

To claim this credit, the employer and the eligible job applicant must complete Form 8850: “Pre-Screening Notice and Certification Request”.  This Form 8850 must be submitted to the State Workforce Agency within 28 days of the new employee's start date.

If an employee is deemed eligible, they will receive certification that they are a member of one of the 10 targeted groups. From there the employer can calculate the amount of credit on Form 5884: “Work Opportunity Credit”. The credit is then claimed on Form 3800: “General Business Credit”. A Tax-exempt employer must use Form 5884-C: “Work Opportunity Credit For Qualified Tax Exempt Organizations Hiring Qualified Veterans” when calculating the amount of credit only for employees that are qualified veterans.

Any unused credit is subject to the normal credit carry-back and carry-forward rules.

If you would like to learn more or to set up a consultation call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.

The above information is of a general nature only and should not be relied upon for specific situations.