The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment.WOTC joins other workforce programs that incentivize workplace diversity and facilitate access to good jobs for American workers.The Consolidated Appropriation Act, 2021 (Section 113 of Division EE P.L. 116-260) authorized the extension of the Work Opportunity Tax Credit (WOTC) until December 31, 2025.
Notice 2021-43, issued on August 10, 2021, provides transition relief by extending the 28-day deadline for employers hiring individuals who are Designated Community Residents or Qualified Summer Youth Employees who begin work on or after January 1, 2021, and before October 9, 2021, to submit a completed Form 8850 to the designated local agency (DLA) no later than November 8, 2021.
Notice 2020-78, issued on December 11, 2020, provides transition relief for employers that hired certain individuals residing in empowerment zones by extending the 28-day deadline for employers who submit a certification request for an individual who began work between January 1, 2018, and December 31, 2020.
The certification of an individual as a Designated Community Resident under § 51(d)(5), or as a Qualified Summer Youth Employee under § 51(d)(7), requires that the individual reside within an empowerment zone.
Q-1. What is the Work Opportunity Tax Credit? (added September 24, 2021)
The Work Opportunity Tax Credit, or WOTC, is a general business credit provided under section 51 of the Internal Revenue Code (Code) that is jointly administered by the Internal Revenue Service (IRS) and the Department of Labor (DOL). The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025. The WOTC may be claimed by any employer that hires and pays or incurs wages to certain individuals who are certified by a designated local agency (sometimes referred to as a state workforce agency) as being a member of one of 10 targeted groups. In general, the WOTC is equal to 40% of up to $6,000 of wages paid to, 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.
Thus, the maximum tax credit is generally $2,400. A 25% rate applies to wages for individuals who perform fewer than 400 but at least 120 hours of service for the employer. Up to $24,000 in wages may be taken into account in determining the WOTC for certain qualified veterans. An employer cannot claim the WOTC for employees who are rehired. In general, taxable employers may carry the current year’s unused WOTC back one year and then forward 20 years. See the Instructions to Form 3800 (General Business Credit) for more information.
Q-2. Are both taxable and tax-exempt employers of any size eligible to claim the WOTC? (added September 24, 2021)
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. While taxable employers claim the WOTC against income taxes, eligible tax-exempt employers can claim the WOTC only against payroll taxes and only for wages paid to members of the Qualified Veteran targeted group.
Q-3. For which employees may an employer claim the WOTC? (added September 24, 2021)
An employer may claim the WOTC for an individual who is certified as a member of any of the following targeted groups under section 51 of the Code:
- the formerly incarcerated or those previously convicted of a felony;
- recipients of state assistance under part A of title IV of the Social Security Act (SSA);
- residents in areas designated as empowerment zones or rural renewal counties;
- individuals referred to an employer following completion of a rehabilitation plan or program;
- individuals whose families are recipients of supplemental nutrition assistance under the Food and Nutrition Act of 2008;
- recipients of supplemental security income benefits under title XVI of the SSA;
- individuals whose families are recipients of state assistance under part A of title IV of the SSA; and
- individuals experiencing long-term unemployment.
Q-4. What does an employer need to do to claim the WOTC? (added September 24, 2021)
On or before the day that an offer of employment is made, the employer and the job applicant must complete Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit). The employer has 28 calendar days from the new employee’s start date to submit Form 8850 to the designated local agency located in the state in which the business is located (where the employee works). Additional forms may be required by the DOL to obtain certification. See the Instructions to Form 8850 and the DOL Employment and Training Administration’s website on WOTC for more information. Following receipt of a certification from the designated local agency that the employee is a member of one of the 10 targeted groups, taxable employers file Form 5884 (Work Opportunity Credit) and tax-exempt employers file Form 5884-C (Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans) to claim the WOTC. See the Instructions to Form 5884 and Form 5884-C for more information. Additionally, see the LB&I and SB/SE Joint Directive on the Work Opportunity Tax Credit that the IRS issued to help certain employers affected by extended delays in the WOTC certification process.
Q-5. If an employer is eligible for other wage-based credits, can it also claim the WOTC? (added September 24, 2021)
Generally, the wages that are used to calculate the WOTC cannot be used to calculate other wage-based credits, however an employer may be able to claim more than one wage-based credit for the same employee. Provided the same wages are not used to calculate each credit, an employer may be able to claim the WOTC and another credit such as the American Rescue Plan’s Employee Retention Credit (ERC), the Empowerment Zone Employment Credit, the Employer Credit for Paid Family and Medical Leave, and the ERC for employers affected by qualified disasters, among others. For example, a small business can combine the WOTC with the American Rescue Plan’s ERC and claim both credits on wages paid to the same employee, provided that any wages used to calculate the WOTC are not also used to calculate the ERC.
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