Navigating the Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) is a federal, employment-based tax credit program that can help businesses grow and strengthen their bottom line. The best part? It does this by helping individuals from select groups who might otherwise go untapped get hired!

WOTC offers benefits to your businesses by offsetting capital costs, minimizing your tax liability, and enhancing cash flow. However, navigating this complex tax credit can be tricky. Keep reading to learn more about how to take advantage of this tax credit.

Understanding the qualified groups and ineligible individuals

The WOTC can only be claimed on wages paid to members of targeted groups.
The statute identifies 12 separate targeted groups with distinct requirements:
1. Qualified IV-A Recipient
2. Qualified Veteran
3. Qualified Felon
4. Designated Community Resident
5. Vocational Rehab Referral
6. Qualified Summer Youth Employee
7. Qualified SNAP Recipient
8. Qualified SSI Recipient
9. Long-Term Family Assistance Recipient
10. Qualified Long-Term Unemployment Recipient
11. Unemployed Veterans
12. Disconnected Youth

If the employer is an individual, wages paid to the employer’s siblings, parents, step-parents, nieces and nephews, cousins, children, stepchildren, descendants of those children, and any dependents are not qualified for the WOTC.

If the employer is a corporation or partnership, wages paid to an individual who is at least a 50% stockholder/partner or is related in the above ways to a 50% stockholder/partner are also not qualified wages for the WOTC.

Important considerations for claiming the credit

    • To claim the credit, Form 8850 must be completed with the employee in question and submitted to the “State Workforce Agency” (SWA) in the state the employee was hired within 28 days of the employee’s hiring date. The state workforce agency is whichever local state agency handles unemployment claims in the state the employee was hired . If the certification is not applied for in time, the employee is ineligible for the credit, without exception. If the employee is already certified by the SWA as a member of a targeted group on the date of hire, Form 8850 does not need to be submitted.
    • Once the SWA has certified the employee as a member of a targeted group, the credit can be claimed by completing Form 5884 as part of the annual tax filings. Uncertified employees never qualify for the WOTC.
    • It is also important to note that the WOTC cannot be retroactively applied unless the employee was certified as a member of a targeted group by the SWA on the hiring date.
    • The credit can only be claimed once per employee per year and is not available for employees hired after 12/31/25. An individual must be certified as a member of a targeted group to qualify for the WOTC. Rehires do not qualify. Being a member of multiple targeted groups does not allow the credit to be claimed multiple times.

How much is the credit for?
The general rule is the WOTC allows for a credit of up to 40% of qualified first-year wages up to $6,000 paid in the first year of employment to members of targeted groups. This credit is reduced to 25% of qualified wages for employees that worked between 120 and 400 hours in the first year and is disallowed for employees working less than 120 hours in the first year.

How do you claim this credit?
To claim the credit, complete Form 5884 Work Opportunity Credit as part of that year’s tax filing. The wage expense deduction should be reduced by the amount of WOTC claimed in that year, even if the full credit is not used in that year. If wages are being capitalized, the depreciation expense must be reduced by the WOTC claimed.

Due to the complexity of this tax credit, we highly recommend working with a qualified professional. Our experts can help you determine eligibility; contact us to learn more!

If you would like more information on WOTC, check out our FAQ document by entering your information to download below.

 

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