The Work Opportunity Tax Credit for Employers

Tax Credits for Hiring Qualified Workers

Work Opportunity Tax Credit Explained
Work Opportunity Tax Credit Explained. Image Source/Getty Images

What is the Work Opportunity Tax Credit? 

The Work Opportunity Tax Credit provides incentives to employers who hire qualified veterans and others from specific targeted groups. 

UPDATE: The Work Opportunity Tax Credit was begun in 1996 to encourage employers to hire and retain veterans and individuals from other target groups with significant barriers to employment. This tax credit has been modified and extended several times.

 The credit was scheduled to be eliminated for 2015, but the PATH Act of December 2015 reinstated the tax credit and extended it through December 31, 2019. The most recent changes have been incorporated into this article. 

 How Does the Work Opportunity Tax Credit Work?

The Work Opportunity Tax Credit (WOTC) is not one but several tax credits given to employers for hiring certain individuals who meet specific criteria. The amount of tax credit you can claim depends on several factors: 

  • The targeted group the newly hired employee belongs to
  • The wages paid to that individual in the first year of employment, and
  • The number of hours worked during that first year.  

All categories of WOTC credits have a maximum credit available. The maximum amount of the WOTC varies by individual hired:

  • $2,400 for each new adult hire;
  • $1,200 for each new summer youth hire,
  • $4,800 for each new disabled veteran hire, and
  • $9,000 for each new long-term family assistance recipient hired over a two-year period.

Target Groups for Hiring

The new employee hired must be in one of nine target group and must be qualified by the state employment agency at time of hire:

  • Long term Temporary Assistance for Needy Families (TANF) recipient
  • Other TANF recipient
  • Food stamp recipient
  • Designated community residents (DCR) who live within Empowerment Zones or Rural Renewal Counties
  • Summer youth employee
  • Veterans (under the Returning Heroes Tax Credit and Wounded Warriors Tax Credit)
  • Vocational rehabilitation referral
  • Ex-felons (hired within one year after conviction or release from prison)
  • Supplemental Security Income (SSI) recipient.

 The 2015 changes, as part of the PATH Act, allow employers to qualify for the tax credit for hiring long-term unemployed persons who begin work after December 31, 2015. To be qualified, the recipient must have been unemployed for not less than 27 weeks and must have been receiving unemployment compensation during this period. 

Length of Hire

The Department of Labor specifies that employers must meet minimum hiring length requirements to qualify for the WOTC. For the Temporary Assistance for Needy Families (TANF) recipients, the credit is a percentage of first year and second year wages, if the recipient works at least 400 hours in each year. 

  • If the individual works at least 120 hours, the employer may claim a tax credit equal to 25% of the individual's first year wages, up to the maximum tax credit.
  • If the individual works at least 400 hours, the employer may claim a tax credit equal to 40% of the individual's first year wages, up to the maximum tax credit.

     To Qualify and Apply for the Work Opportunity Tax Credit

    To qualify, you must submit an application for each employee hired. If approved, you can include that employee on your tax credit application with your business tax return.

    The qualification process begins the day the worker is hired. You as the employer must complete page 1 of the application form (IRS Form 8850) on the day of hiring, and page 2 of this form after the individual is hired. You  may also need to have the worker qualified by a state employment agency. 

    Then, you must apply for the credit by completing IRS Form 5584, along with your business tax return. 

    Read more about How to Qualify for the Work Opportunity Tax Credit and check the Department of Labor WOTC page for details and forms.

    As you can see, this process is complicated.

    In order to assure that you receive the credit, you may want to consult with your tax professional or attorney before proceeding. 

    More Information from the IRS 

    For more detailed information, read this article on the Work Opportunity Tax Credit