Unlock Hidden Savings:
A Guide to the Work Opportunity Tax Credit (WOTC)
Reduce your federal tax liability while helping targeted hiring groups.
Employers may claim up to $9,600 per eligible hire with the WOTC program.
Some job seekers face major barriers as they search for long-term employment. The Work Opportunity Tax Credit (WOTC) is a valuable and underused tool that can significantly reduce your business’ federal tax liability while benefitting targeted hiring groups. By identifying eligible new hires and submitting the correct forms on time, employers can claim up to $9,600 per employee. With leading-edge tools and support from ASAP Payroll, the WOTC process becomes easy, automated, and effective.
What Is the Work Opportunity Tax Credit?
The Work Opportunity Tax Credit (WOTC) is a workforce program established as part of the Small Business Job Protection Act, designed to offer a federal tax credit to employers who hire and employ workers from ten targeted groups that regularly face employment challenges. The plan effectively incentivizes employers to hire and maintain a diverse workforce by reducing hiring costs and offering a significant tax credit.
To qualify, employers must apply for certification that a new hire qualifies as a member of a targeted group before they can claim the tax credit. Once a new hire is certified and has worked a designated number of hours, taxable employers can claim the WOTC as a general business credit against their business income taxes.
Currently, the WOTC is effective until December 31st, 2025 as part of the Consolidated Appropriations Act, 2021. Although some states like New York have already introduced legislation to establish their own workforce programs akin to the WOTC, there are no guarantees that the federal program (and employer benefits) will continue into 2026 and beyond.
That’s why employers should act quickly to claim payroll tax credits, maximize their benefits and save money hiring in the event that the WOTC is not extended.
-4-1.png?width=480&height=600&name=asap%20payroll%20(2)-4-1.png "asap payroll (2)-4-1")
WOTC Eligibility: Who Qualifies?
- See our Blog: Do Your New Hires Qualify for the Work Opportunity Tax Credit?
-
According to IRS guidelines, employers are eligible to apply for the WOTC if they
hire and employ workers from any of the following ten targeted hiring groups:
Qualified IV-A Recipient
A IV-A recipient is a member of a family receiving assistance from a state program funded by the Temporary Assistance for Needy Families (TANF) program. The recipient must be awarded assistance for at least 9 months out of an 18-month period that ends on the employer’s hiring date.
Qualified Summer Youth Employee
Youth employees must reside in an Empowerment Zone (EZ), enterprise community, or renewal community and only be employed between May 1st and September 15th.
Qualified SNAP Benefits Recipient
This includes any qualified member of a family enrolled in the Supplemental Nutritional Assistance Program (SNAP) who is officially receiving food stamps.
Long-term Family Assistance Recipient
This includes any qualifying Long-Term TANF recipient
Vocational Rehabilitation Refferal
Qualified Veteran
Qualified
Ex-Felon
Qualified Supplemental Security Income (SSI) Recipient
Designated Community Resident (DCR)
Qualified Long-Term Unemployment Recipient
How Much Can You Save?
For some targeted groups, including Qualified SNAP recipients, Qualified Ex-Felons, and Designated Community Residents, the employer’s federal tax credit (WOTC) is equal to 40% of the first $6,000 in wages with a cap at $2,400 annually per eligible employee.
Regardless of the targeted employee category, each employer is eligible to claim the credit at the 40% rate if the employee has worked a minimum of 400 hours during their first year of employment. If the employee has worked between 120 and 399 hours, the employer can only acquire a credit of 25% of qualified wages.
For employers who hire Long-term TANF Recipients, the tax credit can be up to $9,000 over two years. When hiring certain veterans, the tax credit can amount to $9,600, depending on certain factors, including the hire’s unemployment duration, service-connected disability, and other circumstances.
For Summer Youth Employees, credit can be claimed for up to $1,200 if the employee has worked up to 400 hours (similar to non-seasonal credit situations).
Example #1:
A recipient of long-term family assistance works over 400 hours in their first year. Their employer qualifies for and claims the maximum credit of $4,000. In the employee’s second year, they work the same number of hours. Their employer is now eligible in the second year for a 50% credit on up to $10,000 of earned wages, leading to a $5,000 credit in their second year of employment. The employer has benefited from $9,000 in claimed WOTC over the span of two years.
Example #2:
A qualified ex-felon works for 250 hours in their first year of employment. Since they worked for less than 400 hours, their employer is only eligible to claim WOTC against eligible wages at a rate of 25%. Even with the reduced rate, the employer can still claim $1500 in federal credit for the year.
Example #3:
A veteran who has been unemployed for eight months and receives service-connected disabilities is hired by a new employer, works over 400 hours, and earns $32,000 in net income in their first year of employment. Due to the veteran’s period of unemployment and receipt of disability services, up to $24,000 of their wages are eligible for WOTC credit at a rate of 40%. The employer claims WOTC against the $24,000 eligible wages and receives $9,600 in federal credit for the year.
WOTC Filing Process
To receive the WOTC as a hiring tax credit, it’s necessary to complete multiple IRS forms, locate & submit paperwork to a qualifying state workforce agency (SWA), gain certification, and complete a multi-step tax filing and claim process.
Pre-Screening (IRS Form 8850 + ETA Form 9061)
The first step in the WOTC filing process is to prove that a job applicant is a qualified member of a targeted hiring group. Employers and new hires must jointly complete and submit WOTC IRS Form 8850 and ETA Form 9061 to demonstrate this.
IRS Form 8850, Pre-Screening Notice and Certification Request for Work Opportunity Credit, must be simultaneously submitted with ETA Form 9061 before or on the same day the job offer is made. Form 8850 requires information regarding when the new hire qualified as a member of a targeted hiring group, when they were offered the job, when they were hired, and their start date.
ETA Form 9061 requires information regarding the individual characteristics of the applicant, how they qualify for one of the ten targeted hiring groups, and all supporting documentation used to confirm eligibility with the state workforce agency (SWA).
These two forms must be submitted simultaneously to a qualifying workforce agency in the state where the employer’s business is located (where the employee works). Both forms must be completed and submitted within 28 calendar days following the new hire’s start date.
Note: Job applicants who are Qualified Long-Term Unemployment Recipients (LTUR) must also submit ETA Form 9175, a Self-Attestation Form (SAF). In some cases, job applicants who are conditionally pre-certified as part of a targeted hiring group must submit ETA Form 9062 instead of ETA Form 9061. Lastly, in some cases, the Spanish – ETA Form 9061 must be used for translation purposes among Spanish-speaking hires.
State Workforce Agency (SWA) Certification
Pre-screening and certification must be completed by a qualifying State Workforce Agency (SWA), which can include a number of local, county, state, or federal agencies, including all of the following:
- American Job Centers (AJCs)
- City and County Social Services Offices
- Vocational Rehabilitation Agencies
- Veterans Administration (VA) and other service organizations
- Department of Corrections
- Organizations funded by grants through the Workforce Innovation and Opportunity Act (WIOA)
Tax Filing and Claiming the Credit
In addition to submitting and completing pre-screening and certification through a SWA, there are additional requirements an employer must meet before they can claim federal credit.
Each new hire from a targeted hiring group must be in their first year of employment with the employer and complete at least 120 hours of service in their first year. If an employee has previously worked for the employer or is related to the employer, they do not qualify.
Once a taxable employer receives certification from a SWA, they can claim the credit as a general business credit on Form 3800 against their business income tax liability or tax owed for Social Security. The employer must file the following to claim the credit:
- Form 5884 – used to claim WOTC for all first- and/or second-year wages paid to targeted hiring group employees
- Form 3800 - used to claim general business credits
- Income Tax Return (Form 1040 , Form 1120, and/or others if required)
Note: Most taxable employers can carry a year’s unused WOTC back one year and then forward up to 20 years.
Common Mistakes to Avoid
See our Blog: Avoid These 5 Common Mistakes When Claiming WOTC
Missing the 28-Day Window
As part of the screening and certification process, Form 8850 must be submitted (or postmarked, if sent by mail) within 28 days following the job applicant’s start date. Missing this WOTC filing deadline can mean the difference between receiving thousands of dollars in federal credit or nothing at all.
Not Integrating WOTC into Onboarding
When a business fails to integrate WOTC into their onboarding process, it can lead to unintended manual errors regarding new hire information, targeted hiring group information, forms submission, meeting the 28-day submission timeline, and more. In sum, these errors can make it difficult to successfully apply for WOTC per new hire, but also accurately file and claim the WOTC.
Poor Recordkeeping
Throughout your hiring, onboarding, and workforce management process, it’s always essential to keep accurate and easily accessible digital records (employee information, tax/payroll information, and more). This is especially critical for compliance with the WOTC application and claims process. A streamlined recordkeeping system ensures you can gather, file, and retrieve WOTC data in a timely and seamless way to claim maximum credits.
FAQ's
What happens if I miss the 28-day deadline?
If an employer fails to submit WOTC forms within the required 28-day window, they will not be able to claim federal credit for that new hire/employee. According to IRS and Department of Labor guidelines, there are no exceptions to this rule, no opportunities for appeals, and any forms submitted after the 28-day deadline must be automatically rejected by the qualifying SWA who receives the forms.
Can part-time workers qualify?
Under certain conditions, a part-time worker can be eligible for WOTC, assuming they’ve worked at least 120 hours in their first year of employment. In most cases, an employer can claim a credit of 25% of qualified wages for an employee who works between 120 and 399 hours. The rate is 40% of qualified wages for employees who work 400 hours or more (for most but not all targeted hiring groups).
Where can employers locate job candidates in WOTC targeted hiring groups?
A number of organizations, including the American Job Centers (AJCs), partnering agencies, and other social programs receiving federal funding can help employers locate talented employees who are within a WOTC targeted hiring group. These organizations sometimes host job fairs, connect employers with conditionally screened/qualifying candidates, and can be an ongoing resource for new hires who are adjusting to their new positions.
What if the employee quits early?
An employer can still claim the Work Opportunity Tax Credit (WOTC) if an employee quits early, as long as they’ve worked at least 120 hours (the minimum hours threshold for WOTC). Any employee who has worked 399 hours or less still qualifies for partial credit at a rate of 25% against their qualified first-year wages.
Peter
Franchise Owner