Finance

Work Opportunity Tax Credits

Introduction

The Work Opportunity Tax Credit (WOTC) is a federal income tax credit designed to help people gain on-the-job experience and achieve better employment outcomes. It offers employers an incentive to hire new employees from specific target groups facing significant barriers. Employers claim about $1 billion in WOTC tax credits each year and, in 2015, the WOTC program was retroactively reauthorized for a 5-year period from Dec. 31, 2014 to Dec. 31, 2019. Qualified tax-exempt organizations can also take advantage of WOTC by hiring eligible veterans and claiming the credit against the employer social security tax.

 

Who is eligible?

  • TANF (Temporary Assistance to Needy Families) recipients
  • SNAP (food stamp) recipients
  • Ex-felons
  • Veterans
  • Vocational rehabilitation referrals
  • SSI (Supplemental Security Income) recipients
  • Long-term unemployment recipients
  • Designated Community Residents (living in Empowerment Zones or Rural Renewal Counties – EZ/RRC)
  • Summer Youth Employees (living in EZ/RRC)

These last two groups stopped qualifying for WOTC as of 12/31/16. The Bipartisan Budget Act of 2018 retroactively extended the EZ designation for 2017 only. However, employers may continue to submit WOTC paperwork for hiring new employees from these groups to speed up processing should Congress authorize a retroactive extension of the EZ/RRC designations.

 

How much is the tax credit?

Employers can earn a tax credit typically between $1,500 and $9,600 per employee hired, depending on:

  1. the new hire’s target group,
  2. the wages paid to the new hire, and
  3. the number of hours worked during the first year of employment.

For most target groups (including ex-felons, food stamp recipients), employers can claim up to 40% of the first $6,000 in qualified first-year wages for a maximum of $2,400 per new hire. Employees must work at least 120 hours in the first year of employment to receive the tax credit and there is no limit to the number of individuals an employer can hire to qualify for the tax credit.

 

How employers apply for and claim WOTC certification

 

Step 1: Pre-screening to determine applicant’s WOTC eligibility

 

Step 2: Requesting WOTC certification

 

Step 3: Submitting forms to state workforce agency

 

Application tips for employers

  • Correct forms: Make sure to use most current versions of forms (found on U.S. Dept. of Labor site)
  • Additional documentation: Submit requested documentation with application to speed up certification process
  • Completeness: Check that forms are completed by required dates, new hire’s full physical address is included (instead of P.O. box), new hire’s birth date is given (if needed), and full Social Security and Federal Employer ID Numbers are provided
  • Signatures: Make sure forms are signed by new hire and employer; do not sign Spanish versions of forms (used only for translation purposes)
  • Timeliness: Applications must be postmarked within 28 calendar days after new hire’s start date; employers must keep proof of submission (via web site, mail or fax) to verify timely submission in case of an IRS audit

 

Submitting applications to State Workforce Agency

Employers should submit completed applications to the State Workforce Agency in the state where its business is located and is paying the employee’s wages. Employers should NOT submit applications to the U.S. Dept. of Labor, Employment & Training Administration, IRS or any other federal agency

Employers may authorize an intermediary (such as an accountancy firm or management consultant) to act on their behalf in submitting WOTC applications and managing the certification process. IRS Form 2848 (Power of Attorney and Declaration of Representative) must be signed and submitted to the State Workforce Agency

States vary in their methods for accepting applications; some have automated systems for accepting online submissions, while others rely on postal mail, fax and/or email. Here you can find WOTC application submission instructions by state and a directory of State WOTC Coordinators. Some states may take longer to process applications than others. In Massachusetts, processing time is currently about 2 weeks for employers submitting small numbers of applications, whereas in California there is currently a 9-10 month backlog of applications waiting to be processed.

 

Receiving WOTC certification

Claiming Work Opportunity Tax Credits

 

Social enterprises can help educate employer partners on WOTC

While some employers (particularly large ones) may know about and already pursue WOTC, many employers are not familiar with the program. Social enterprises can add value by sharing information about the benefits and requirements of WOTC.

In discussions with potential hiring partners, social enterprises can highlight benefits of WOTC that employers often find compelling:

  • Many, if not most, of the individuals referred by social enterprises are eligible for WOTC
  • For most target groups, employers can claim up to $2,400 per new hire
  • Employers have up to 20 years to use WOTC credits
  • No limit to the number of individuals an employer can hire to qualify for the tax credit

Important to note that WOTC may not be appropriate for all employers. Employees need to work at least 120 hours (and at least 400 hours for larger credits) to be eligible, so WOTC may not make sense when hiring part-time workers for fewer hours. Some employers may be concerned about having sufficient capacity to manage WOTC paperwork.

 

Social enterprises can support employer partners through the WOTC application process

If the employer is challenged in submitting WOTC application on time (by 28th day after new hire starts work), your social enterprise can be proactive in collecting required information from employees and sending to hiring partners as early as possible. Before social enterprise participants even begin applying for jobs, they can provide information to complete IRS Form 8850 and ETA Form 9061 (e.g., during orientation); in states/cities with Fair Chance hiring policies, SEs may need to hold back this information until a conditional offer is made.

As soon as an employer hires a participant, your social enterprise should prepare required paperwork/documentation, pre-filling as much information on forms as possible so employers can sign and submit right away. Be sure to send hiring partners reminders of upcoming deadlines. During the 28-day window after a new hire starts work, your social enterprise should send frequent reminders to employers to submit WOTC forms to their state workforce agency

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