Work Opportunity Tax Credit (WOTC) Service

Some WOTC Statistics

The Work Opportunity Tax Credit is available throughout the United States, and in 2022 it was worth approximately $5 Billion dollars to employers.  2,569,056 total Work Opportunity Tax Credits were issued in the United States in 2022. WOTC was renewed for five years, and is currently active through 12/31/2025. 

Since it was introduced in 2017, the Long Term Unemployment category has never reached over 4.67% of the total. Until 2021 that is. At 410,015 certifications, it’s now more than 4 times higher than 2019.

One study by the RAND Corporation, looking specifically at qualified veterans, found that the WOTC increased their employment rates by 1.8 percentage points and their wage income by 39.9 percent.

Participating in WOTC can drive financial savings to an organization, and studies by Peter Cappelli, Wharton School professor and economic researcher, indicates that it is among the most successful labor market policies enacted by Congress.

Although the actual value of the issued tax credits would actually vary based on hours worked, and category the employee came in under, we are using the average tax credit value of $2,400. This would give us a potential total value of 2022’s tax credits at up to an impressive $6.1 Billion.

Originally introduced as a temporary measure by Section 1201 of the Small Business Job Protection Act of 1996 (P.L. 104-188). The Consolidated Appropriations Act, 2021 (Section 113 of Division EE P.L. 116-260) authorized the extension of the WOTC until December 31, 2025.  It allowed for-profit employers to claim a tax credit against their federal income tax liabilities for hiring members of seven specifically designated groups.  It has remained part of the tax code ever since benefiting thousands of companies in diverse industries. Yet, many more do not take advantage of the credit’s potentially significant benefits.

The Work Opportunity Tax Credit (WOTC) is a federal tax credit program created to provide an incentive for businesses to facilitate access to employment for American workers, especially those from disadvantaged groups. The program benefits employers as well as employees – offering enhanced job opportunities to disadvantaged employment candidates and providing significant financial savings to the employer, which can be used for further candidate outreach, to offset training costs or other business needs. It is surprising that, decades after the program’s introduction and with so many clear signs of its efficiency, many employers are still hesitant to fully explore the WOTC program and continue to question its benefits. There are many reasons why it is a good time to start pursuing the Work Opportunity Tax Credit and stop leaving the free money on the table.

How does the Work Opportunity Tax Credit (WOTC) work?

Depending on eligibility category, hours worked, and wages paid, an employer can secure a tax credit of up to $9,600 per hire. Whether you are a small or medium-sized business or an industry giant, this amount in credit savings is bound to make a difference and greatly impact a company’s financial situation. In today’s business environment, companies of all sizes are looking for ways to save money and improve the bottom line, and WOTC can provide immediate returns.

The Work Opportunity Tax Credit program is designed to enhance employment opportunities for individuals who have a more difficult time finding and maintaining employment. Accordingly, companies participating in this program are fulfilling the intent and desire of Congress and the DOL with this job program, and driving significant savings back to their shareholders.

Work Opportunity Tax Credit certification and screening process

Before employers can claim a Work Opportunity Tax Credit, they must first receive certification from a State Workforce Agency (SWA) that the new hire meets the qualifications of one of the target groups. This is done using IRS Form 8850 and one of two forms from the Department of Labor.

The first, ETA Form 9061, or the Individual Characteristics Form (ICF), provides specific information about how an applicant answered the WOTC questionnaire. The second, ETA Form 9062, is the Conditional Certification Form for applicants who have been pre-screened for WOTC by an SWA. Both forms must accompany Form 8850 submissions.

Form 8850

Employers have 28 days from a qualified employee’s start date to send Form 8850, also known as the Pre-Screening Notice and Certification Request for the WOTC, to the applicable SWA. The first page, which needs to be completed by the applicant on or before the day of the job offer, outlines the conditions that someone from one of the target groups must meet to qualify for the program. The second page is intended for employers. On it, they will provide their business contact information and the applicant’s key employment-related dates.

Work Opportunity Tax Credit questionnaire

Page one of Form 8850 is the WOTC questionnaire. It asks the applicant about any military service, participation in government assistance programs, recent unemployment and other targeted questions.

Who qualifies for the Work Opportunity Tax Credit?

Employers may qualify for the WOTC if they hire an individual who is a member of one of the target groups determined by the IRS to have historically faced barriers to employment.

Employees eligible under the Work Opportunity Tax Credit program

The following groups are considered target groups under the WOTC program:

• Qualified short-term and long-term IV-A recipients (Temporary Assistance for Needy Families) (“TANF”)
• Qualified Veterans (“QV”)
• Ex-felons (“EF”)
• Designated Community Residents (“DCR”)
• Vocational Rehabilitation Referrals (“VRR”)
• Summer Youth Employees (“SYE”)
• Supplemental Nutrition Assistance Program (SNAP) recipients (“SNAP or Food Stamps”)
• Supplemental Security Income (SSI) Recipients (“SSI”
• Long Term Family Assistance Recipients (“Long-Term TANF”)
• Qualified Long-Term Unemployment Recipients (“QLTU”)

Employees not eligible under the Work Opportunity Tax Credit program

Some exclusions apply to the list of WOTC target groups. Employers who rehire a former employee, a family member or dependent, or someone who will be a majority owner in the business may not be able to claim the tax credit for that individual (even if the individual is otherwise a member of an eligible target group).

Businesses eligible for the Work Opportunity Tax Credit

Any business, regardless of size or industry, may be eligible to claim tax credits under the WOTC program. And because there’s no limit to the number of individuals employers can hire as part of the program, there’s also no cap on the amount of credits that they can claim.

How do employers claim the Work Opportunity Tax Credit?

1. Find eligible applicants
Contact the SWA or local unemployment office for a list of potential job applicants.

2. Screen applicants
Have applicants complete the questionnaire on the first page of Form 8850 on or before the job offer date to see if they qualify for one of the WOTC target groups.

3. File documents
Submit the completed Form 8850 and either ETA Form 9061 or 9062 to the SWA within 28 days of the eligible new hire’s start date.

4. Monitor hours worked and qualified wages paid
WOTC-certified employees must work at least 120 hours during the first year of employment for an employer to claim credits, which are calculated as a percentage of qualified wages. Employees in the TANF recipient category must work 400 hours.

5. Claim the tax credit
Use IRS Form 5884 when filing annual tax returns to claim the WOTC.

6. Keep accurate records
Make copies of all the forms and supporting documents submitted to SWAs and correctly track employee hours in case the IRS decides to audit the credits claimed.

Benefits of outsourcing tax credits and business incentives administration

Both newly eligible business that haven’t yet taken advantage of tax credits and those that already have a large tax credit portfolio may benefit from outsourcing tax credits. It can help them:

• Identify and evaluate new opportunities for which they may be eligible
• Maintain accurate records so they can make informed decisions backed by data
• Stay compliant with changing tax credit laws and avoid penalties
• Report tax credit activities and meet deadlines.

Screening for WOTC Eligibility Without the Hassle

Another reason employers often cite explaining their reluctance to utilize this program is the perception of it being overly burdensome and requiring an onerous amount of administration. There are also worries that candidates may not be comfortable providing information about their potential eligibility for the program.

When it comes to WOTC, the questions to screen candidates can be incorporated into the hiring process in a streamlined way, with the required government forms generated automatically incorporating the responses. In this manner, the process becomes much more efficient and does not require intervention or assistance from the company’s hiring team.

The Department of Labor (DOL) has also specifically provided guidance that participating in WOTC screening does not violate discriminatory hiring laws. Because WOTC-eligible candidates often know there is an incentive to businesses for hiring them, and because more and more companies are participating in the program, there is a lower rate of opt-out by candidates. Prospective employees are becoming more comfortable at responding to the WOTC screening questions.

To ensure you don’t miss potential Work Opportunity Tax Credits (WOTC) for your new hires and reduce the burden of implementation, we have partnered with ADP

ADP SmartCompliance for tax credits works seamlessly with your recruiting and hiring software to provide an automated WOTC screening experience. Our best-in-class solution can:

• Integrate with virtually any applicant-tracking solution (ATS): ADP’s WOTC screening solution integrates with your existing ATS, maximizing applicant data capture.
• Maximize your tax credit eligibility: Our single-page questionnaire and intuitive web and mobile app increase application rates and simplify the capture of required WOTC data.
• Optimize results with financial insights: ADP’s benchmarking, analytics and intelligent forecasting tools help maximize results and avoid financial surprises.
• Provide a touchless HR experience: A secure yet easy fit within your hiring process that minimizes work for hiring managers.
• Stay up to date: The recent IRS Update IR-2022-159 may impact your WOTC compliance practices.
• ADP can help. Visit the ADP WOTC Resource Site for the latest details.
• Simplify WOTC screening
• Southern Healthcare Management saved time by switching from a manual WOTC screening process to ADP’s automated solution.

How far back can you claim WOTC tax credits?

Businesses can claim the WOTC credit retroactively by filing amended returns for any open tax years, which in most cases, is three years. The time frame may be longer, however, if the organization endured losses during that period.

Is WOTC tax credit taxable income?

The WOTC credit reduces federal taxable income, meaning that businesses receive a dollar-for-dollar tax credit and still get to deduct expenses related to employment.

Do WOTC tax credits expire?

The current WOTC legislation has been authorized through December 2025, and will likely be extended beyond then given the strong bi-partisan support for the program. Given the financial returns, the ease with which companies can pursue WOTC, and the societal benefits of the program, businesses who are not participating in the program should strongly consider implementing a process to do so.

The administrative challenges, including meeting statutory requirements, filing the required forms and calculating the credit pursuant to the IRS Code, can be readily overcome.

Outsourcing tax credit management to a reliable partner is the safest way to simplify the complex WOTC program application process, eliminate several time-consuming steps, and meet all statutory requirements successfully.

Note: The Refund statute is three years, meaning a company typically has three years (four for may state refunds) before the statute on the refund expires.  After that, that’s it– You walked away from the refund forever!

The WOTC Credit is currently also available through state and US Territory programs in the following states and territories:

• Alabama
• Alaska
• Arizona
• Arkansas
• California
• Connecticut
• Delaware
• District of Columbia
• Florida
• Georgia
• Hawaii
• Idaho
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Louisiana
• Maine
• Maryland
• Massachusetts
• Michigan
• Minnesota
• Mississippi
• Missouri
• Montana
• Nebraska
• Nevada
• New Hampshire
• New Jersey
• New Mexico
• New York
• North Carolina
• North Dakota
• Ohio
• Oklahoma
• Oregon
• Pennsylvania
• Puerto Rico
• Rhode Island
• South Carolina
• South Dakota
• Tennessee
• Texas
• Utah
• Vermont
• US Virgin Islands
• Virginia
• Washington
• West Virginia
• Wisconsin
• Wyoming

What sectors does WOTC occur in the most?

Employers of all sizes are eligible to claim the WOTC. This includes both taxable and certain tax-exempt employers located in the United States and in certain U.S. territories.

How do you calculate the R&D tax credit using the alternative simplified credit method?

In general, the WOTC is equal to 25% of up to $9,600 (depending on the targeted group) of wages paid for those employed at least 120 hours but fewer than 400 hours and 40% of up to $6,000 for those employed 400 hours or more, or incurred on behalf of, an individual who:

• is in their first year of employment;
• is certified as being a member of a targeted group; and.
• performs at least 400 hours of services for that employer.

How much businesses can save

The credit amount for WOTC can be up to $9,600 for each qualified new hire, depending upon the new hires’ WOTC target group. The credit is equal to a percentage of the eligible employee’s wages, and the employee must work at least 120 hours for the employer to receive credit.

WOTC Target Groups

The new employee must belong to one of the following WOTC target groups:

VETERAN TARGET GROUPS                                                                                                                                   MAX CREDIT

Veterans with a service-connected disability who have been unemployed for at least 6 months in the past year     $9,600

Veterans with a service-connected disability and hired within 1 year of their discharge/release date                       $4,800

Veterans who have been unemployed for at least 6 months                                                                                     $5,600

Veterans receiving Supplemental Nutrition Assistance Program (SNAP) benefits                                                    $2,400

Veterans who have been unemployed for at least 4 weeks but less than 6 months                                                  $2,400

NON-VETERAN TARGET GROUPS                                                                                                                         MAX CREDIT

Long-term unemployed                                                                                                                                              $2,400

SNAP recipients                                                                                                                                                         $2,400

Temporary Assistance for Needy Families (TANF) recipients                                                                                    $2,400

Long-Term Family Assistance recipients who are members of a family that has received TANF benefits

for at least 18 consecutive months                                                                                                                             $9,000

Supplemental Security Income recipients                                                                                                                  $2,400

Vocational rehabilitation referrals                                                                                                                               $2,400

Ex-felons                                                                                                                                                                    $2,400

Designated community residents                                                                                                                              $2,400

Summer Youth program participants who are 16 to 17 years old, work between May 1 and September 15,

and live in a designated community area                                                                                                                  $1,200

When to claim the credit

Employers claim the tax credit against federal taxable income for the year that they “realize” the credit, that is, the year that the credit was awarded, not the year that the employee was hired.

WOTC is non-refundable, meaning the business must have a tax liability against which to use the credit.

Unused credit can be carried back one year and carried forward for 20 years.

How to claim the credit

Employee must complete IRS Form 8850 on or before starting the job.

Form 8850 must be postmarked within 28 days of start date and sent to the state Department of Labor for certification.