Updated: Jun 26
What is Work Opportunity Tax Credit (WOTC).
The Work Opportunity Tax Credit (WOTC) is a Federal tax credit program that aims to incentivize workplace diversity and facilitate access to jobs for individuals who consistently face significant barriers to employment, including people with criminal backgrounds. The "qualified ex-felon" category includes people hired within a year of being convicted or released from prison due to a felony. See all targeted groups that qualify employers for WOTC.
Many employers don't realize the potential tax benefits of hiring WOTC-qualified individuals. Some of them are hiring qualified workers without being aware of it. The Work Opportunity Tax Credit can provide an opportunity for struggling businesses to get back on their feet after the pandemic.
"Millions of dollars are left on the table each year because employers don't realize it's available." - Eric Weiss, Human Capital Management Team Lead at Paycom, a payroll provider based in Oklahoma City.
What can be claimed?
The tax credit amount for WOTC can range depending on the worker category, the number of hours worked, and the wages earned. Employers can claim between $2,400 and $9,600 per qualified hire. In other words, employers can receive 25% to 40% of the employee's wages in the first year of their employment as a one-time tax credit. There is no limit on the number of new hires who can qualify an employer for a tax credit. Veteran target groups are usually eligible for a higher tax credit.
In contrast, non-veteran target groups, such as people with a criminal history, allow employers to receive a tax credit of up to $2,400. Regarding the hours, employees must work at least 120 hours for the employer to receive credit. Read more about specific groups' max credit eligibility here.
Vendors like Equifax Workforce Solutions and Paycom have WOTC calculators that can help employers understand their potential credits.
When and how can the tax credit be claimed?
Employers can claim the tax credit against federal taxable income for the year that the credit was awarded, not the year the employee was hired. It is also important to mention that unused credit can be carried back one year and carried forward for 20 years. WOTC is also non-refundable, meaning the business must have a tax liability against which to use the credit.
To apply, the employer and the job applicant complete an IRS form, Form 8850, before the employee starts working. The employer has 28 calendar days from the new employee's start date to submit Form 8850 to the state Department of Labor for certification.
Learn more about the WOTC program on IRS's website: https://www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit