Can the Federal Work Opportunity Tax Credit (WOTC) Provide Value to Your Business?

At a glance

• The main takeaway: The Work Opportunity Tax Credit (WOTC) may not be directly tied to employment and payroll tax; however, it can still be a valuable savings tool for employers.
• The impact on your business: While WOTC can provide employers with significant benefits, it’s important to understand the complex eligibility requirements brought on by the IRS and DOL.  
• Next steps: Aprio’s Employment Tax Services team can facilitate a review of your current WOTC eligibility and/or established program.

Schedule a consultation today to learn more.

The full story:

While the Work Opportunity Tax Credit (WOTC) may not specifically be an employment tax/payroll savings opportunity, it does have a close connection to the operations of a company’s payroll/HR department and can be a valuable tool for many employers. In this article, we provide a brief review of the potential benefits and eligibility requirements with respect to the WOTC.

What is the WOTC?

WOTC is a general business credit provided under section 51 of the Internal Revenue Code (IRC) that is jointly administered by the Internal Revenue Service (IRS) and the Department of Labor (DOL). 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. Additionally, the WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025. The credit may be claimed by an eligible employer that hires, pays, or incurs wages paid to certain individuals who are certified by a designated 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.

The maximum tax credit is generally $2,400, and a 25% rate applies to wages for individuals who perform fewer than 400 hours 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.

Key target groups for WOTC

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, including:

• 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)
• Veterans
• 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
• Individuals experiencing long-term unemployment

New hire eligibility process

New hires complete a confidential questionnaire that helps determine eligibility for the WOTC.  Each pre-qualified new hire will need to submit the questionnaire within 28 days of hire along with the required supporting documentation depending on the target group to verify identity.  Pre-qualified new hires are submitted to a State Workforce Agency (SWA) determined by the state where the employer is physically located. 

How to claim WOTC for new hires

Employers may claim the federal WOTC for certified new hires based on the target group, first year wages earned, and first year hours worked. The WOTC is reported on IRS Form 5884.  Taxpayers may claim the tax credit for certified new hires in the year in which the certification was received. 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.

The bottom line

While WOTC can provide employers with significant benefits, it’s important to understand the complex eligibility requirements brought on by the IRS and DOL. Aprio’s Employment Tax Services team can facilitate a review of your current WOTC eligibility and/or established program.