What is the Work Opportunity Tax Credit, and how do you claim it?

The Work Opportunity Tax Credit (WOTC) incentivizes employers to hire individuals from groups that traditionally face hiring challenges. Participating in the program can reduce your federal income tax liability and promote workplace diversity and inclusion.

In this article, we’ll explain who is eligible for the WOTC, how it is calculated, and what your business needs to do to claim it.

So let’s jump right in.

What is the WOTC? 

The WOTC is a tax credit employers can claim when they hire from groups that often face employment barriers due to their background.

The program allows you to: 

• Reduce your taxes: Employers can claim the WOTC against their income taxes and reduce their tax liability. In the process, you’re providing opportunities for individuals who face employment challenges.

• Diversify your workforce: Participating in the WOTC program encourages you to consider candidates who may have otherwise been overlooked. A more diverse workforce means more individuals contributing different viewpoints and ideas, which can boost innovation and help your business grow.

Originally, the WOTC was scheduled to end in 2020. However, employers can still claim it for certain individuals hired on or before December 31, 2025.

The specific amount your company can claim depends on the target group you hire from, and the number of hours they work. As a guide, though, you can claim up to $9,600 per qualified employee, resulting in the potential for significant tax savings for your company.

Note that the WOTC program is only available to employers in the US. If your company is based outside the US but you have employees there, you won’t be able to claim the credit.

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What are the WOTC target groups?

The WOTC target groups include the following:

Veterans

Qualified veterans include:

• Members of a family that has received Supplemental Nutrition Assistance Program (SNAP) benefits or food stamps for at least three months

• Those who have been unemployed for a minimum amount of time (four weeks or six months)

• Those who are entitled to compensation for a disability that was incurred during active military service

IV-A recipients

An IV-A recipient is a member of a family that has received Temporary Assistance for Needy Families (TANF) payments for any nine months during the 18-month period before their hire date. 

SNAP recipients 

SNAP offers food benefits to eligible low-income families. Qualified SNAP recipients must be between 18 and 40 years old, and a member of a family that has received SNAP benefits.

Designated Community Residents (DCRs)

A DCR is an individual who resides in either:

• An Empowerment Zone (EZ) or community that is eligible to receive tax incentives

• A Rural Renewal County (RRC) or county in a rural area that lost population from 1990 to 1994 or 1995 to 1999

Vocational rehabilitation referrals

Vocational rehabilitation referrals are individuals with physical or mental disabilities. They’ve been referred to an employer while receiving (or after completing) rehabilitation services approved by the state, completed under the Ticket to Work program, or carried out under the Department of Veterans Affairs. 

Supplemental Security Income (SSI) recipients

Qualified SSI recipients are individuals who receive SSI benefits — monthly payments made to people with disabilities and older adults with little or no income. 

Long-term family assistance recipients

Long-term family assistance recipients are members of a family that have received TANF payments for 18 consecutive months prior to their hire date.

Long-term unemployment recipients

Long-term unemployment recipients are those who have been unemployed for 27 consecutive weeks and have received unemployment compensation during some or all of the time that they were unemployed.

Summer youth employees

Qualified summer youth employees reside in an EZ and are at least 16 years old but under 18 on their hiring date (or on May 1st — whichever is later). They may only work for the employer between May 1st and September 15th.

Ex-felons

Qualified ex-felons are individuals who are hired within a year of the time they’re released from prison or convicted of a felony.

Note that each group has its own eligibility criteria, and some exclusions may apply. For example, even if someone is part of a target group, you may not be able to claim the tax credits if they’re a former employee. Dependents and certain relatives of an employer are also not eligible. 

How is the WOTC calculated?

Employers can claim 40% of eligible wages per employee. However, the employee must be in their first year of employment and certified by a local state workforce agency (SWA). 

Employers can claim 25% if the employee works at least 120 hours, but that percentage increases to 40% if they work at least 400 hours. The amount you can claim depends on the target group. 

As of 2024, the maximum tax credit employers can claim for veterans is as follows:

For other target groups, the maximum you can claim is:

Taxable employers in the US can claim the WOTC against their federal income taxes. Certain tax-exempt employers can use Form 5884-C to claim the credits. However, they can only claim against payroll taxes, and can only claim 26% (instead of 40%) of first-year wages to qualified veterans.

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How to claim the WOTC for new hires

While the WOTC program can help reduce your tax liability and incentivize you to diversify your workforce, navigating the process can be challenging.

To claim the WOTC, follow these steps:

1. Identify qualified employees

The first step is to identify who qualifies for the WOTC program. Start by reviewing the list of target groups you can hire from, as listed above.

If you’re unsure of a potential candidate’s eligibility, contact your local SWA or unemployment office for advice.

2. Pre-screen applicants and fill out Form 8850

Next, pre-screen your applicants and have them fill out the first page of Form 8850, which asks questions about their background. 

3. Obtain certifications and complete Form 9061 or 9062

Once you’ve decided to hire the candidate, you must submit Form 8850 to your local SWA (not the Internal Revenue Service (IRS)) within 28 days of the employee’s start date, along with Form 9061 (the Individual Characteristics Form) or Form 9062 (the Conditional Certification Form). 

The employee will need to fill out Form 9061 and provide supporting documents, including any records of receiving SNAP or unemployment benefits. If an SWA has already pre-conditionally certified the job applicant, you can fill out and submit Form 9062 instead.

The SWA will review the forms and confirm that the employee belongs to a target group. Hold onto this certificate, as you’ll need it to claim the tax credit.

If you’re hiring a long-term unemployment recipient, you’ll also need to complete Form 9175.

4. Calculate the tax credit

Once you’ve received confirmation from your SWA that the employee qualifies, the next step is to calculate the WOTC. You can claim 25% of the employee’s first-year wages if they work at least 120 hours, or 40% if they work at least 400 hours.

For example, say you hire a qualified SNAP recipient — a target group with a maximum tax credit of $2,400. If the individual works 400 hours and earns $6,000 (400 x $15/hour) during their first year of employment, you can claim the full credit ($2,400) when you file.

Remember that you can only claim the WOTC on qualified wages, which are wages subject to Social Security and Medicare taxes. If you receive payment for the employee from a federally funded program, you won’t be able to claim the tax credit.

5. Claim the tax credit

Assuming you’ve met all the requirements, all that’s left is to use Form 5884 to fill in the total qualified first-year wages (or second-year wages for long-term TANF recipients), and submit it with your federal tax return.

6. Maintain all documentation

If your company is participating in the WOTC program, store all forms and supporting documents for at least three years.

By maintaining thorough documentation, you demonstrate compliance with the program requirements and have evidence to support the claim if your company gets audited.

Simplify the process with Remote

When you hire through Remote’s employer of record (EOR) service, we can help determine if your potential hire is eligible for the WOTC — and help you claim it. Our all-in-one global HR platform is designed to simplify all your HR needs, from onboarding and benefits to payroll and day-to-day HR management.

To learn more about how we can save you time, money, and resources, speak to one of our friendly experts today.

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